With The Trade War Impact Looming, More Cash Being Pumped Into Chinese Economy

More liquidity is being added on to the Chinese economy which is showing signs of slowing down even as the economy also prepares to face the negative outcome of the trade war that it is embroiled in with the United States.

The attempts by the Chinese authorities to cut down on the very high levels of debt has resulted in the loss of some momentum for the Chinese economy this tear. Additionally, the import tariffs imposed on Chinese goods worth about $250 billion by the United States has also created pressure in the economy.

The decision of injection of cash into the Chinese economy was announced by the central bank of China in an effort to prop up the economy and said that 750 billion yuan ($109 billion) would be freed up by it for the economy. This is the forth occasion so far this year that the central bank has eased the amount of money that banks are mandatorily required to gold with themselves. However the root cause of the problem lie deeper, say analysts.

Larry Hu, an economist at investment bank Macquarie, believes that the latest move is “far from enough to turn the economy around” there might still be reluctance on the part of the bank to lend. In the next few months, the Chinese central bank will be forced to rethink its decision to inject more cash into the economy, he said in a note to clients.

The trade war between the two largest economies of the world has seen import tariffs being imposed on hundreds of billions of dollars of each other’s products by the US and China.

Even as the impact of the trade war emerges, Chinese authorities have tried to spur the economy through looser monetary policy, more, infrastructure spending and tax cuts.

“The economy clearly needs the support,” Wei Yao, a China economist at investment bank Societe Generale, said in a note to clients Monday. There would be a further slowdown in the next few quarters, she predicted.

The Chinese currency has been pushed further at risk of losing out against the dollar because of the latest move to loosen its monetary policy by China. The yuan has already  dropped almost 6 per cent against the dollar so far this year.

Hu said that the yuan “will surely face more depreciation pressure after the cut”. There was a drop of 0.4 per cent in the Chinese currency against the dollar on Monday.

The policies of the People’s Bank of China, the country’s central bank,  are stark opposite to the stance and the policies that are currently being followed by the US central banker – the US Federal Reserve – which increased rates earlier last month for the third consecutive occasion this year. This hike in rates has attracted investors who find that holding assets in dollars instead of the yuan more appealing.

(Adapted from CNN.com)

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