China Foreign-Currency Reserves Drop on Trade Tensions, Yuan

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Beijing has stepped up liquidity support across the financial system this year as policy makers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that a heated trade war with the United States could deal a damaging blow to the broader economy.

China's central bank said it would cut reserve requirement ratios by 100 basis points from 15 October. That said, amid a worsening trade-war outlook, negative sentiment around China's economy and a surging US dollar could yet test the nation's defenses. The tech-heavy ChiNext board fell 2.9 percent.

The RRR cut will fill in the liquidity gap of banks and put no downward pressure on the yuan as the country's monetary policy is not eased, according to the PBOC statement.

Despite the PBOC's official stance that its monetary policy is not yet accommodative, the fourth RRR cut of the year came as trade tensions between China and the US escalate and will likely drag longer than many expect, analysts noted. The move, the central bank's fourth in 2018, came amid concerns about the economic impact of Beijing's ongoing trade war with Washington.

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On Friday, Chinese technology stocks listed in Hong Kong slumped on a Bloomberg report that the systems of multiple USA companies had been compromised by malicious computer chips inserted by Chinese spies.

Hong Kong's Hang Seng index added 0.4 per cent, while Chinese H-shares listed in Hong Kong rose 0.87 per cent. 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. China's yuan was weaker at 6.8979 per US dollar at 0333 GMT, compared with a previous onshore close of 6.8725 per dollar. The spot market opened at 6.9000 per dollar and was changing hands around 6.9030 in late afternoon trading, the lowest level since mid-August. It edged up to 6.92 to the dollar on Tuesday.

Spot yuan was on track for its lowest close in seven weeks against the USA dollar, as expectations of more easing measures by China, plus surging U.S. bond yields, put pressure on the Chinese currency.

On Monday, the spread between Chinese and USA 10-year Treasury bonds was 58.4 basis points, compared with 150 basis points at the end of 2017.

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The stock market declined Monday taking its cue on Asian trading, as another strong U.S. jobs reading further fanned expectations the Federal Reserve will hike interest rates at a quicker pace.

Chinese stocks took a hammering Monday as traders returned to work after a weeklong holiday in the world's second-largest economy.

Investors are also keeping an eye on Brazil after right-wing Congressman Jair Bolsonaro won almost half the votes in Brazil's first-round presidential election on Sunday, marking a major shift to the right in Latin America's largest nation fuelled by voters' anger at corruption.

In response, officials have pledged to pump billions of dollars into infrastructure projects, shored up the value of the currency and moved to backstop a plunging stock market.

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The losses in NY seeped into Asia, where Shanghai sank 2.4 percent and Hong Kong lost 0.8 percent with property firms hit by expectations the city's banks will lift mortgage rates again as they track a likely Fed hike.

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