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Chinese Yuan Weakens As Exports Fall, Capped by RRR Cut

September 9, 2019 at 16:04 by Andrew Moran

Three CNY100 bills of 2005The Chinese yuan is weakening to kick off the trading week, driven by a decline in August exports as the world’s second-largest economy continues its trade dispute with the US. But investors were optimistic about Beijing’s $126 billion cash injection into the struggling market, especially with analysts anticipating greater stimulus for the remainder of 2019.

According to the General Administration of Customs, Chinese exports dropped 1% year-on-year in August, following a 3.3% gain in July. The market had forecast a 2% increase. Imports slumped 5.6% last month, up from 5.3% in July. It was slightly better than the median estimate of 6%.

Overall, China’s trade surplus widened to $34.83 billion in August, up from $26.3 billion at the same time a year ago.

While markets are bearish on this data, the Institute of International Finance (IIF) has a different viewpoint:

Perhaps more surprising, given repeated rounds of tariffs, is that China’s exports remain robust. Part of the resilience in China’s exports reflects a shift in composition, away from the US and towards the euro zone and other economies in Asia, including Vietnam.

American and Chinese trade representatives will resume negotiations early next month and meet face to face for the first time since the beginning of August.

In other data, investors will wait for inflation, automobile sales, and new loan growth this week.

Recently, the People’s Bank of China (PBOC) announced that it will inject more than $126 billion into the financial system by slashing the reserve requirement ratio (RRR). The central bank will lower the RRR by 50 basis points for commercial banks and 1% for smaller institutions. It will also bring down the RRR for larger organizations to 13%.

This is the seventh RRR cut in the last 18 months, accounting for about $500 billion in net liquidity. Analysts are expecting several more declines in the RRR over the next 12 months.

Beijing has been trying everything to spur lending and stimulate economic activity in the middle of the prolonged trading war.

The USD/CNY currency pair rose 0.09% to 7.1220, from an opening of 7.1157, at 15:54 GMT on Monday. The EUR/CNY advanced 0.34% to 7.8759, from an opening of 7.8490.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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