Chinese Stocks Slip on Central Bank’s RRR Cut

Chinese stocks slipped on Monday as investors become unnerved by the central bank’s decision to cut the amount of cash that the country’s lenders must hold as reserves. It was a move to spur economic growth in the Asian country.

Chinese stocks People's Bank of China's website shown on a computer monitor

The People’s Bank of China, or the PBOC, announced measures on Sunday to slash the reserve requirement ratio (RRR), which is the amount of cash that most commercial banks need to set aside at the central bank.

The decision, the central bank’s fourth in 2018, came in the midst of worries about the economic impact of Beijing’s ongoing trade war with the US.

At present, the RRR stands at 15.5 percent for large institutions and 13.5 percent for smaller banks.  It will be cut by 100 basis points from October 15, according to the central bank.

One economist said that the move was not really a surprised.

“We were expecting  that we would see a triple-R cut in October for a number of reasons,” said Sian Fenner, who is a senior economist at Oxford Economics, in an interview.

“They clearly want to boost liquidity,” Fenner said. “This month we’ve got tax repayments, we’ve also got some maturing of some debt but also, they want to make sure that they’re increasing their credit growth which has been quite sluggish…because of earlier deleveraging of financial risks.”

It is important for Beijing to manage those risks for longer term growth, she said. She also added that “the focus is now on growth.”

With the increase in US tariff likely to begin “being a drag” on Chinese exports, Fenner said Beijing wants to “shore up and provide some support for domestic demand.”

Other market observers, on the other hand, said that the cuts were bigger than expected.

A slash of 1 percent by the Chinese central bank was unexpected because it would “release something like 700 billion yuan ($101.72 billion)” into the country’s banking system, according to Francis Lun, who is the CEO of Geo Securities.

“That is quite a lot of money around,” said Lun. “I think… the government’s really worried that the economy will slow down and the stock market will tank.”

On the back of the central bank’s announcement, China’s mainland markets traded in the negative territory for much of their first trading day following the Golden Week holiday. Both the Shanghai composite and the Shenzhen composite slipped more than 3 percent during the trading day.

The Shanghai composite typically sees gains after the week-long holiday. According to Chinese financial services firm Wind Information, the Shanghai composite has closed higher on the first day of trading after the national holiday for the past five years. Seven out of the last 10 years saw higher closes on the first post-holiday session.

Shares of all major Chinese banks also fell in the aftermath of the PBOC decision. Industrial and Commercial Bank of China slipped as low as 3.8 percent. China Construction Bank dipped by more than 4 percent while Agricultural Bank of China shed 2.5 percent during the trading day.

Referring to the market moves, Lun said that the Chinese stocks were playing “catch-up on last week’s falling market,” with Hong Kong’s Hang Seng index falling  by around 1,216 points while other Asian emerging market dropped steeply.

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