China shares fall despite central bank action

Roman Schwartz
October 12, 2018

The Central Bank of China declared on Sunday that it was clipping the reserve requirement ratios (RRRs) by one percentage point from 15 October to lower the financing costs and encourage growth in the world's second-largest economy.

Higher US bond yields and a narrowing of the yield differential between the US and China will also pressurize the yuan.

On Monday, the yuan sank to a 22-month low of 6.93 to the dollar, making one yuan worth about 14.4 cents.

Japan's Nikkei fell 3.4 percent, the steepest daily drop since March, while the broader TOPIX lost around $195 billion in market value. "This will likely only come when the negativity from US-China tensions and EM risks fades", said Jeff Ng, Asia chief economist at Continuum Economics.

It also raised the stakes for USA inflation figures due later on Thursday as a high outcome would only stoke speculation of more aggressive rate hikes from the Federal Reserve.

"We expect the dollar rally to lose steam". The gauges followed Hong Kong's Hang Seng index, which remained open during the holiday and slid 4.38 percent over its course. On Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE, slumped on a media report that the systems of multiple U.S. companies had been compromised by malicious computer chips inserted by Chinese spies.

There was also a danger for the USA if Beijing had to intervene heavily to support the yuan.

With the increase in U.S. tariffs likely to start "being a drag" on Chinese exports, Fenner said Beijing wants to "shore up and provide some support for domestic demand".

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"Whether it is just in response to the weight of evidence from the strong United States data or instead an active decision by Fed officials to steer the market more towards its tightening profile (the "dots") presented at its rate decision last month, there is little doubt that officials have turned more hawkish recently", analysts at ANZ said in a note.

"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 US 10-year Treasury bonds was 58.1 basis points according to Eikon data, compared with 150 basis points at the end of 2017".

Asian markets fell on Monday, extending last week's sell-off as another strong USA jobs reading further fanned expectations the Federal Reserve will hike interest rates at a quicker pace.

China is signaling that it is anxious about its economy. The index closed 0.2 per cent higher on Tuesday.

Australian shares were down 1 percent.

Oil prices skidded in line with U.S. equity markets, even though energy traders anxious about shrinking Iranian supply from U.S. sanctions and kept an eye on Hurricane Michael, which closed some U.S. Gulf of Mexico oil output. The offshore yuan was trading 0.01 percent firmer than the onshore spot at 6.8697 per dollar.

USA crude was down 0.7 percent at US$73.80 a barrel. Brent crude fell 0.75 percent to $83.58 per barrel.

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