China to cut banks' FX reserve ratio to rein in yuan weakness
China's central bank will cut the amount of foreign exchange reserves required for financial institutions, in an effort to slow the decline of the yuan.
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Posted 9/1/2023, 4:56:25 AM
reuters.com
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China's central bank has cut the main benchmark interest rate in an attempt to address falling apartment prices, weak consumer spending, and broad debt troubles, but the reduction was smaller than expected, signaling the potential ineffectiveness of traditional tools to stimulate the economy.
China's central bank has cut its one-year loan prime rate for the second time in three months as the economy struggles to recover from the pandemic, with challenges including a property crisis, falling exports, and weak consumer spending.
Chinese shares dropped as banks in the country cut interest rates less than expected, with the benchmark one-year loan prime rate being lowered by 0.1 percentage point to 3.45%.
The foreign exchange reserves of the State Bank of Pakistan fell below $8 billion for the first time in five weeks, dropping to $7.93 billion, which may pose challenges as the country faces significant debt servicing payments.
China's largest banks are preparing to cut interest rates on existing mortgages and deposits in an effort to stimulate consumer spending and support economic growth; the move is part of the government's targeted measures to alleviate pressure on lenders' profit margins and encourage investment in the stock market.
China's offshore yuan weakened after the country's central bank announced a cut in banks' reserve requirement ratio, which aims to support the economy but could further worsen the decline of the yuan.
The massive retreat of funds from Chinese stocks and bonds is reducing China's influence in global portfolios and accelerating its decoupling from the rest of the world, as foreign holdings of equities and debt have significantly decreased amid China's economic slump and tensions with the West.
China experienced its largest capital outflow since 2015, with $49 billion leaving the country, as economic concerns prompt investors to withdraw; of this, $29 billion was withdrawn from securities investments, including bonds. The outflow was compounded by a record-high $12 billion in mainland-listed stocks being dumped by foreign investors and a $16.8 billion deficit in direct investment, the largest since 2016. The decline in the capital account was exacerbated by the tourism season, with outbound travel negatively impacting the services sector, while inbound travel remained suppressed, causing a continued deficit in the services trade. Efforts by Beijing, such as reducing the foreign currency reserves held by banks, have aimed to support the yuan but have been unable to prevent a significant decline in the offshore yuan. Weak exports and the allure of US yields have also contributed to the yuan's decline, further complicating China's capital flight situation, as doubts about the country's ability to achieve its 5% GDP target for the year grow.