For the fourth time this year, the People’s Bank of China (PBOC) will be cutting rates. The PBOC said on Oct 7 that it will cut the reserve requirement ratio (RRR) by 100 basis points, infusing nearly $109.2 billion cash into the banking system (see: all Asia-Pacific (Emerging) ETFs).
The RRR is currently 15.5% for large institutions and 13.5% for smaller banks. The cut follows persistent debt issue and escalating tit-for-tat tariffs between Beijing and Washington. Chinese stocks weakened post week-long holidays, with the major indexes in both Shanghai and Shenzen down nearly 3.7% at close on Oct 8. During these holidays, the yuan fell below 6.9 against dollar.
From Oct 15 onward, RRR will be reduced for large commercial banks, joint-stock commercial banks, city commercial banks, rural commercial banks and foreign banks. This rate cut is a much-needed step to pump billions of dollars in infrastructure projects as investment growth is declining to a record low. Fixed asset investment, a key metric measuring economic growth expanded by 5.3% in the January-August period on a year-over-year basis, which is lower than 5.5% in the January-July, the lowest level on record.
Per PBOC, 450 billion yuan ($65 billion) will be used to settle the medium-term loan facilities that expire on Oct 15. The central bank uses these kinds of facilities to manage the short-term and long-term liquidity in banking system. The remaining 750 billion yuan ($110 billion) will be used for market-lending purposes. This increased cash with the banks would aid the private businesses to access more credit as the fortunes look dim for their products in the United States — the second-largest market after the European Union.
Yuan is looking increasingly unattractive as the difference between Chinese and U.S. 10-year treasury bonds has been at its 7-year low in the past week. China’s foreign exchange reserves have dipped for two consecutive months with the currency depreciating 3.5% this year. Manufacturing fell to its lowest level in 16 months (read: Treasury Yields at New 7-Year High: ETF Strategies to Play)
“The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly,’’ it said (read: 4 ETF Picks for October).
The following Chinese ETFs could expect some pricing action following this rate cut:
It tracks the FTSE China 25 Index. AUM is $4.8 billion and the expense ratio is 0.74%. It has lost 10.3% year to date.
It tracks the MSCI China Index. AUM is $3.2 billion and expense ratio is 0.62%. It has lost 14.5% year to date.
It tracks the CSI China Overseas Internet Index. AUM is $1.4 billion and expense ratio is 0.70%. It has lost 23.3% year to date.
It tracks the S&P China BMI Index. AUM is $985 million and expense ratio is 0.59%. It has lost 14.2% year to date.
It tracks the CSI 300 Index. AUM is $960 million and expense ratio is 0.65%. It has lost 21% year to date.
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