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2-min read

China Pumps $109 Billion Into Economy as Trade War With US Intensifies

The reserve cut, the fourth by the People's Bank of China this year, came after Beijing pledged to speed up plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further.


Updated:October 7, 2018, 8:32 PM IST
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China launches Piyao web service to eliminate online rumours (Reuters)
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Beijing: China's central bank on Sunday said it was cutting the reserve requirement ratios (RRRs) by one per cent from October 15, which will inject a net $109.2 billion in cash into the banking system, amid a deepening trade war with the US that has increased pressure on growth in the world's second-largest economy.

The reserve cut, the fourth by the People's Bank of China (PBOC) this year, came after Beijing pledged to speed up plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further.

The PBOC said on Sunday it will cut the RRR for RMB deposits by one percentage point starting from October 15. The cut will enable banks in China to release 1.2 trillion-yuan cash for additional lending.

Some of the liquidity unleashed will be used to pay back the 450 billion yuan ($65 billion) of the medium-term lending facility that will mature on October 15, state-run Xinhua news agency reported.

In addition, the liquidity of another 750 billion yuan ($110 billion) will be injected into the market for lending, according to the PBOC statement.

The announcement of the relaxing the RRR requirement for the banks, which are also saddled with the huge local government debt of $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.

The huge cash outflow from the banks was expected to help the private businesses to access more credit as their products faced an uncertain prospect in the US, which is China's second largest market after the European Union.

US President Donald Trump kicked off the trade war in June by slapping additional tariffs on billions of dollars Chinese exports, piling up pressure on China to reduce over $335 billion trade deficit in the $710.4 billion bilateral trade.

The US Federal Reserve move to increase the interest rates also sparked fears of more capital outflows from China. The injection of cash into the economy will also boost hopes that the negative impact of higher US tariffs on Chinese exports can be eased.

The PBOC's announcement comes at the end of week-long national day holidays which ends on Sunday. 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.

The RRR cut will fill in the liquidity gap of banks and put no downward pressure on the yuan as the country's monetary policy is not eased, the PBOC statement.

There are sufficient conditions for the RMB exchange rate to remain basically stable at a reasonable and balanced level, it said. "The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly," it said. The RRR cut will cover the yuan deposits of large commercial banks, share-holding commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

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