Cool heads

7 January 2019 By Christopher Beddor

The central bank says it will slash the amount lenders need to hold in reserve, freeing up a net $117 bln. It’s not full-blown stimulus. Still, an easing move on the eve of talks signals Donald Trump may be right: China’s economy, and its negotiating position, is weakening.

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The People’s Bank of China said on Jan. 4 that it would reduce the amount of capital banks need to hold as reserves by a total of 100 basis points. The cut will be implemented in two stages, effective Jan. 15 and Jan. 25. The PBOC said it estimates the move, the fifth in a year, will release a net 800 billion yuan ($117 billion) of liquidity.

The central bank in December introduced a new policy tool, the targeted medium-term lending facility, to offer cheaper funding aimed at encouraging banks to lend to small and private companies. The one-year interest rate will be 15 basis points lower than that of the existing medium-term lending facility.

The United States and China are due to hold mid-level trade talks in Beijing on Jan. 7 to 8. U.S. President Donald Trump said on Jan. 6 that a downturn in China’s economy “gives them a great incentive to negotiate”.

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