Investors have been wondering for weeks what China might do, other than impose levies of its own, in response to Donald Trump’s imposition of tariffs on more than $200bn (£153bn) worth of Chinese imports.
After all, such is the imbalance of trade between China and the US, China was always going to quickly run out of American goods on which to slap retaliatory tariffs of its own.
This weekend, investors got an answer, of sorts.
The People’s Bank of China (PBOC) on Sunday cut by one percentage point the so-called “Reserve Requirement Ratio”, effectively the amount of cash that banks must hold as reserves, with effect from Monday next week.
The move is expected to release some $109.2bn (£83bn) of cash into the banking system.
Ostensibly, the move was aimed at supporting the economy, by encouraging the banks to lend more and stimulate demand.
Investment growth during the first half of the year slowed to a record low, while retail sales growth has also been less than expected, raising concerns about the strength of the economy.
But this move, the fourth of its kind this year, is also being seen as a response to the trade war initiated by the US president – the impact of which is largely yet to be felt.
China’s markets, which were closed all of last week for a national holiday, opened on Monday morning with the yuan falling to its lowest level against the US dollar since the middle of August.
It has led some to speculate that China is seeking to allow its currency to slide in order for its exports to remain competitive even though the country’s premier, Li Keqiang, promised in a speech last month that the country would not seek to take part in competitive devaluation.
Since the end of March, China’s currency has fallen by just under 11% against the greenback.
More surprising, though, has been the reaction has been in China’s stock market.
The CSI 300 index of blue-chip stocks fell by 4.3%, its biggest one-day fall since February 2016, while the broader Shanghai Composite Index fell by 3.7%, its worst one-day fall for three months.
Since hitting an intra-day peak of 3587 on January 29, the Shanghai Composite has fallen by 24%, taking it firmly into bear market territory.
An easing in monetary policy of this kind might normally be expected to give stock markets a lift.
There are a number of possible explanations as to why this has not happened.
Firstly, with the markets having been closed for a week, Monday was the first opportunity for Chinese investors to respond to the big falls on global stock markets last week.
There was an element of catch-up in this sell-off.
Secondly, there was probably a specific reaction to last Friday’s news that a number of American companies may have seen their IT systems compromised by malicious computer chips inserted by Chinese spies.
That saw shares of Chinese tech companies listed in Hong Kong fall sharply last week and, on Monday, Chinese-listed tech stocks followed suit.
But thirdly, the sell-off may reflect concern that the easing by the PBOC was greater than expected, causing investors to wonder whether the bank is seriously worried about the state of the economy and the general lack of demand.
So perhaps the question is not why the markets appeared to ignore what the PBOC did on Sunday, but how much worse the sell-off might have been had the PBOC not cut reserve requirement ratios.
The general drift in the yuan is likely to continue.
The PBOC is expected to continue loosening monetary policy in coming months just as the US Federal Reserve is raising interest rates in response to the growing strength of America’s economy.
Moreover, attention is starting to focus on a “poison clause” inserted in the free trade agreement signed by the US, Canada and Mexico last week, in which the latter two are required to give Washington notice of any trade negotiations with a so-called “non-market economy”, of which China is one.
The clause gives the US the right to back out of the deal in the event of any such negotiations.
Beijing reacted angrily this weekend to news of the clause, which is being seen as a deterrent to others thinking of entering trade negotiations with China, including the EU and Japan.
Wilbur Ross, the US commerce secretary, said it was possible the US would seek to insert similar clauses to free trade deals agreed with other countries, adding: “It’s logical, it’s a kind of poison pill.”
So, with the Trump administration is likely to ratchet up pressure further on Beijing, it all adds to a growing sense of unease about the Chinese economy.
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