China’s stock markets tumbled on Monday, as investors were unnerved by the central bank’s decision to slash the amount of cash that the country’s lenders must hold as reserves, in a bid to help spur economic growth.
A report published in CNBC stated that the announced measures on Sunday to cut the Reserve Requirement Ratio (RRR) — or the amount of cash that most commercial banks need to set aside at the central bank. The move, the central bank’s fourth in 2018, came amid concerns about the economic impact of Beijing’s ongoing trade war with Washington.
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The report further stated that the RRR currently stands at 15.5 per cent for large institutions and 13.5 per cent for smaller banks, and will be cut by 100 basis points from October 15, the central bank said. One economist said the move was “not really a surprise”.
“We were expecting that we would see a triple-R cut in October for a number of reasons,” Sian Fenner, senior economist at Oxford Economics, said on Monday. It is important for Beijing to manage those risks for longer term growth, she said, adding that “the focus is now on growth.”
With the increase in US tariffs likely to start “being a drag” on Chinese exports, Fenner said Beijing wants to “shore up and provide some support for domestic demand”. Other market observers, however, said the cuts were bigger than expected.
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A cut of 1 per cent by the Chinese central bank was unexpected because it would “release something like 700 billion yuan (approximately $101.72 billion)” into the country’s banking system,” Francis Lun, the CEO of Geo Securities, said.
On the back of the central bank’s announcement, China’s mainland markets traded in negative territory for much of their first trading day following the Golden Week holiday. Both the Shanghai composite and the Shenzhen composite fell more than 3.7 per cent by the end of the trading day.