6 Sep

China’s Reserve Ratio Cut Might Infuriate Trump

WRITTEN BY Mohit Oberoi, CFA
  • Today, China announced a reserve ratio cut for banks. The People’s Bank of China lowered the reserve ratio by 50 basis points for all banks—the third cut this year. Notably, monetary easing has been the norm globally as growth stalls.
  • China’s economy has slowed down. President Trump’s tariffs aggravated the slowdown.

China cuts reserve ratio

Today, the People’s Bank of China cut the reserve ratio for all banks by 50 basis points. According to Reuters, the reserve ratio cut would release 800 billion yuan in liquidity. The cut will be effective on September 16. Monetary easing is pretty much the norm globally. The Fed was on a rate hike cycle until last December. Notably, the Fed lowered rates by 25 basis points in July. Most leading economies across the globe are looking at monetary easing to shore up growth. In 2019, global economic growth will likely be the slowest since the financial crisis of 2008–2009.

Stimulus measures

China has been gradually taking several monetary and fiscal measures since its economic growth has slowed down. Along with the reserve ratio cut, China looked at other monetary policy tools to shore up the economy. The US-China trade war is also taking a toll on China’s economy. Reportedly, several US companies plan to diversify their sourcing from China. However, the US-China trade war isn’t 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 the tariffs would dent the company’s competitiveness. Alphabet settled a $170 million fine with the FTC (Federal Trade Commission). Earlier this year, the FTC also approved a $5 billion fine on Facebook.

Would China’s reserve ratio cut help?

China’s reserve ratio cut would help increase liquidity in its banking system. However, the larger problem in China and the US is that business spending slowed down. The slowdown in corporate spending is largely due to trade war uncertainty. While China’s reserve ratio cut would help the liquidity increase, it might not fix China’s sagging economy.

How will President Trump react?

President Trump lashed out at China and Europe for loose monetary policy. He sees their monetary policy easing as a ploy to weaken their currency and gain an advantage in the trade war. Notably, loose monetary policy leads to a weaker currency. A weak domestic currency gives exporters an advantage. Last month, the US designated China as an official “currency manipulator.”

Fed and China’s reserve ratio cut

President Trump has also criticized the Fed for not lowering rates faster. While the Fed lowered rates by 25 basis points in July, President Trump wanted a bigger cut. After China’s reserve ratio cut, he might want a bigger rate cut from the Fed. As central banks globally adopt a more dovish policy, the Fed might also have to follow suit.

Meanwhile, President Trump lashed out at the Fed today. He tweeted, “I agree with @jimcramer, the Fed should lower rates. They were WAY too early to raise, and Way too late to cut – and big dose quantitative tightening didn’t exactly help either. Where did I find this guy Jerome? Oh well, you can’t win them all!”

There has been some de-escalation in the US-China trade war this month. Stock markets have also reacted favorably. Based on Thursday’s closing prices, Apple, Facebook, Amazon, and Alphabet have gained 2.2%, 2.8%, 3.6%, and 1.9%, respectively, in September. Alibaba (BABA) has gained 2.2%. Reportedly, Alibaba put its Hong Kong listing on hold amid social unrest.

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