Will release of $109bn reserve boost China’s flagging economy?

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

China's stocks fell sharply on Monday despite Beijing's weekend announcement that it will slash the level of cash that banks must hold as reserves, a sign of underlying investor anxiety over a heated Sino-U.S. trade war.

On Sunday, the People's Bank of China (PBOC) announced a 100-basis-point cut to banks' reserve requirement ratio (RRR), stepping up efforts to support the economy and calm market worries.

PBOC's latest move came at the end of a week-long national day holiday in China.

Friday's US non-farm payrolls showed job creation slowed in September, likely from Hurricane Florence's impact on restaurant and retail payrolls, but the Labor Department report also showed a rise in wages that could keep the Federal Reserve on track for more interest rate hikes.

On the same day, the above-mentioned banks will use the funds released by the RRR cut to repay the medium-term loan facilities of the central bank where they borrowed.

The ongoing trade war with the USA has exerted great pressure on Chinese exports as rounds of retaliatory tariffs undercut China's price advantage.

Pence's speech marked a sharper U.S. approach towards China, going beyond the bitter trade war between the world's two biggest economies, which has magnified concern about the outlook for China's economy. When policy is said to be accommodative, it means the central bank is making it cheaper for businesses and households to borrow in hopes that they will increase spending and lift the economy.

Deputy Chief Economist at the China Center for International Economic Exchanges, Xu Hongcai stated that this "very timely" RRR cut is enough to boost up confidence in the economy. "There is room for further reductions and I expect another 1 percentage point cut by the year-end", Xu added.

China has retaliated with its own set of tariffs, and has accused the USA of launching the largest trade war in economic history. The government has taken measures to help companies impacted by the trade war, he added.

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that the worst that could happen is the USA imposing levies on all Chinese imports, but that would only hit 0.7 percentage points of China's growth.

The Asian Development Bank says China's economy is expected to expand at a 6.6 percent annual pace this year but slow to 6.3 percent in 2019. However, some key activities have abated more steeply. The July nationwide jobless rate rose to 5.1 percent.

Chinese commission and state council have also substituted the term "deleveraging" with "structural deleveraging", a swap indicating less stringent on debt.

Zhang Yiping, senior economist at Merchants Securities in Shenzhen said, "Liquidity is flush in the banking system. The external environment is becoming tougher and we can not rule out further RRR cuts".

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