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- Today, China has announced a reduction in the reserve requirement ratio for banks. The People's Bank of China lowered the reserve requirement ratio by 50 basis points for all banks – the third reduction this year. Notably, monetary easing has been the norm globally as growth stagnates.
- The Chinese economy has slowed down. President Trump's tariffs worsened the slowdown.
China cuts reserve rate
Today, the People's Bank of China has reduced the reserve requirement ratio of all banks by 50 basis points. According to Reuters, the reduction in the reserve ratio would release 800 billion yuan of liquidity. The reduction will come into effect on September 16th. Monetary easing is about the norm on a global scale. The Fed was on a rate hike cycle until last December. The Fed cut rates by 25 basis points in July. Most major economies around the world are considering monetary easing to boost their growth. By 2019, global economic growth is likely to be the slowest since the 2008-09 financial crisis.
Stimulus measures
China has gradually taken several monetary and fiscal measures since slowing economic growth. In addition to reducing the reserve requirement ratio, China has been looking at other monetary policy tools to strengthen the economy. The US-China trade war is also weighing on the Chinese economy. According to sources, several US companies are considering diversifying their supply sources in China. However, the US-China trade war is not positive for all US companies. Last year, several US companies, including Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOG) opposed President Trump's tariffs.
Recently, Apple CEO Tim Cook briefed President Trump on how tariffs could hurt the company's competitiveness. Alphabet has fined $ 170 million with the FTC (Federal Trade Commission). Earlier this year, the FTC also approved a $ 5 billion fine on Facebook.
Would the reduction of China's reserve rate be useful?
Reducing China's reserve ratio would help increase the liquidity of its banking system. However, the biggest problem in China and the United States is that business spending has slowed down. The slowdown in business spending is largely due to the uncertainties of the trade war. Reducing China's reserve ratio would help increase liquidity, but it may not solve the slowdown in its economy.
How will President Trump react?
President Trump is taking it to China and Europe for their lax monetary policy. He sees in the easing of their monetary policy a ploy to weaken their currency and gain an advantage in the trade war. In particular, a loose monetary policy leads to a weaker currency. A weak national currency gives exporters an advantage. Last month, the United States designated China as a "money manipulator".
Fed and China reduce reserve ratio
President Trump also criticized the Fed for not lowering its rates faster. While the Fed had lowered its rates by 25 basis points in July, President Trump wanted a bigger cut. After reducing China's reserve rate, it may want a bigger Fed rate cut. While central banks are generally adopting a more accommodating policy, the Fed may also need to do the same.
Meanwhile, President Trump is taking it to the Fed today. he tweeted, "I agree with @jimcramer, the Fed should lower its rates. They were MUCH too early to increase and far too late to reduce – and a large dose quantitative narrowing did not really help. Where did I find this guy Jerome? Oh well, you can not win them all! "
The trade war between the United States and China has declined somewhat this month. Stock markets also reacted favorably. According to Thursday's closing prices, Apple, Facebook, Amazon and Alphabet rose 2.2%, 2.8%, 3.6% and 1.9%, respectively, in September. Alibaba (BABA) gained 2.2%. Alibaba reportedly suspended its listing in Hong Kong due to social unrest.
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