The decision by China‘s central bank to cut the amount of reserves held by banks is an indication that authorities in the world’s second-largest economy are getting nervous about a long-drawn trade war with the U.S., experts said.
China insisted last month, in a 71-page paper, that its economy is “highly resilient” and Beijing is not afraid of a trade war.
At the World Economic Forum in Tianjin, China in September, an official from the country’s securities regulator said there was nothing President Donald Trump’s administration could do to make a significant dent in the Chinese economy. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that the worst that could happen is the U.S. imposing levies on all Chinese imports, but that would only hit 0.7 percentage points of China’s growth.
But the central bank’s move to ease some pressure on the banking sector signals that the situation in China is perhaps not all rosy, experts noted.
“China is probably facing its worst period since the global financial crisis. All news is against it,” Fraser Howie, an independent analyst who has written books about China and its financial system, told CNBC’s “The Rundown” on Monday.
“They certainly want to play down any talks of panic or near panic … but they’re clear it’s not business as usual in China,” he added.
The People’s Bank of China announced on Sunday a 100 basis points cut to the reserve requirement ratio (RRR) for most banks, which will result in an injection of 750 billion yuan ($109.2 billion) in cash into the banking system. But the central bank maintained that its monetary policy is still prudent and neutral — not accommodative.
A neutral monetary policy means the central bank is neither trying to slow nor stimulate the economy. When policy is said to be accommodative, it means the central bank is making it cheaper for businesses and households to borrow in hopes that they will increase spending and lift the economy.
Despite the PBOC’s official stance that its monetary policy is not yet accommodative, the fourth RRR cut of the year came as trade tensions between China and the U.S. escalate and will likely drag longer than many expect, analysts noted.
A prolonged trade war as the U.S. economy appears strong may lead to more investors pulling money out of China. Beijing is therefore taking pre-emptive steps to avoid massive outflows of investor money from its financial system, analysts said, adding that could deal another blow to its economy which is already experiencing slower growth.
“At the beginning of the year, I think (the RRR cuts) had more to do with kind of smoothing out the deleveraging process, just providing liquidity to the banks that might have been experiencing a credit crunch as they were trying to clamp down in shadow banking and some of the other more volatile activities,” Cindy Ponder-Budd, an analyst from research firm View from the Peak, told CNBC’s “Squawk Box” on Monday.
“Economic growth in China is slowing and you’re starting to see the government more proactive in terms of trying to provide stimulus,” she added.
‘China is a bit nervous’
PBOC’s latest move came at the end of a week-long national day holiday in China. When Chinese markets were closed last week, Hong Kong stocks fell for four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show. Experts had expected the sell-off to spill over to the Shanghai and Shenzhen stock markets when they re-open on Monday.
But the RRR cut did little to calm nerves when stock markets in Greater China stumbled at the start of the week’s trading. Stocks in Shanghai and Shenzhen were down almost 3 percent on Monday morning, while Hong Kong was down close to 1 percent.
“China is a bit nervous. There is so much headwinds towards it now and I think it’s right to prepare for the worst and expect the best,” Gareth Nicholson, head of fixed income at Bank of Singapore, told CNBC’s “The Rundown” on Monday.
But Nicholson noted that if the trade situation deteriorates further, China will have a number of levers to save its economy because President Xi Jinping has “political capital.”
“I mean President Xi, if you think about it, he doesn’t have to worry about another election in six months, 12 months, 18 months. He has that kind of stability that if he needs to turn the taps back on, he doesn’t need to worry about saying ‘this pushes the budget out too much, too much debt,'” Nicholson added.
“He can worry about the debt problems three, four, five years down the line,” Nicholson said.