As PBOC slashed its Reserve Requirement Ratio (RRR) for large institutions and smaller banks, investors are trying to understand the rationale and implications of this action because it is the fourth cut for the year. The cut will inject billions of Yuan into the banking system. In doing so, it signals that China is worried about its slowing economy and the effects of trade tariffs.
China is facing too many headwinds at once and is trying to take pre-emptive steps to prevent investors from pulling their money out of China. The central bank announced the RRR cut after a week-long which caused Chinese markets to tumble as investors have to digest a whole week of news in one single day.
Chinese stock markets fell more than 3.7% on Monday as a combination of proactive measures from the PBOC to ease pressure on banks and the ongoing trade tensions between the US and China did little to reassure the markets. The decline shows that the actions did not diminish the anguish, and concerns investors have on the broader Chinese economy. The negative sentiment has also spilled to the Asian, European and US markets at the beginning of the week. The Chinese stocks have partially recovered compared to Monday, but trading in the equity markets remain wobbly. Adding to the current uncertainties, geopolitical risks, rising US interest rates, Treasury yields and US debt deficit are also weighing on the markets.
As investors reassess the growth expectations due to trade tariffs, they will most likely pay particular attention to the rising yields which could be the challenge in the next couple of weeks for the equity markets.
The move accentuated the bearish momentum of the Yuan. Beijing struggled to keep its currency afloat as it has weakened beyond the 6.93 handle. Most Asian currencies were also weaker on Monday because of the RRR cut and the rising US dollar. As the pair moves toward the 7.00 mark, the risks that emerging markets will go down with the fall in the Yuan increases. While trade uncertainties is a major contributing factor in the depreciation of the Yuan, the currency is battling a lot of headwinds at once.
Traders will likely keep a close watch on the key psychological level of 7.
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