HK equities to see more downside as yuan weakens

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China's central bank announced Sunday it would reduce the reserve requirement ratio (RRR) for most banks by one percentage point, the fourth time this year the country has sought to free up credit for businesses as they face down $250 billion in USA tariffs.

China's central bank will cut the reserve requirement ratios (RRR) by one per cent from October 15 which will inject a net Dollars 109.2 billion in cash into the banking system.

On Monday the State Council, China's cabinet, said it will increase export tax rebates from November 1 and will speed up export tax rebate payments in a new bid to boost the real economy and support trade growth. The yuan had depreciated by 8% between March and August earlier this year, sparking fears over potential capital outflows which would place further pressure on the economy.

It will inject a net 750 billion yuan (S$150 billion) in cash into the banking system with the cut by releasing a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of that to offset maturing medium-term lending facility (MLF) loans.

With the full impact of US trade tariffs still to be felt and China's economy waning, policymakers are changing their urgencies to reduce risks to growth, with the stock markets and yuan under pressure.

U.S. President Donald Trump last month imposed a tariff increase on $200 billion of Chinese goods over what he has labeled unfair trading practices and intellectual property demands.

The announcement of the relaxing the RRR requirement for the banks, which are also saddled with the huge local government debt of United States dollars 2.58 trillion comes amid deepening trade war with US and raising of the interest rates by US Federal Reserve, intensifying the pressure on capital outflows.

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Weakening exports were already a drag on growth in the first half of the year after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new US tariffs are imposed.

To maintain a stable renminbi remains one of the key targets of the Chinese monetary policy, according to analysts, despite short-term fluctuations amid economic slowdown risks.

"The ongoing China-US trade war is imposing headwind to China's growth, and monetary easing is being used to counter that", ChiXi Consultants said in a research note to its clients on Monday.

"Moreover, there is still room for further RRR cuts when necessary, though the chance for an interest rate cut is limited given the continued Fed rate hiking cycle, in our view."On Monday, the spread between Chinese and USA 10-year Treasury bonds was 58.1 basis points according to Eikon data, compared with 150 basis points at the end of 2017".

It also comes ahead of Monday's visit here by US Secretary of State Mike Pompeo for the second of talks with Chinese leaders on trade and security issues.

"Some regions and companies have been hit [by trade frictions], but China has the ability to minimize the impact", Mr. Liu was quoted as saying. He also assured that the government has implemented measures to help the companies affected by the trade war. The central bank said it...

With the increase in USA tariffs likely to start "being a drag" on Chinese exports, Fenner said Beijing wants to "shore up and provide some support for domestic demand". Soaring U.S. interest rates and uncertainties surrounding trade war pressurizes worldwide economies.