China promises not to weaken yuan, criticizes US concern

Oil prices fell more than 2 percent as U.S. stocks plunged, even though energy traders anxious about shrinking supply from Iran due to U.S. sanctions and kept an eye on Hurricane Michael, which closed almost 40 percent of U.S. Gulf of Mexico output.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management, said the cut suggested the central bank was anxious about the impact of "external shocks" to markets such as the one delivered last week by US Vice President Mike Pence's criticism of Beijing.

The FTSE China A50 Index of large caps, which includes stocks that overseas investors are more likely to own, sank nearly 5 per cent in its biggest selloff since January 2016.

"The progressing China-US exchange war is forcing headwind to China's development, and money related facilitating is being utilized to counter that", DBS said in an exploration note.

The move signals China's economy "is really not doing well", Chen Shouhong, founder of the investment information platform Gelonghui, wrote on WeChat, a Chinese social media service. The yuan market at 0414 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.8571 6.844 -0.19% Spot yuan 6.8703 6.861 -0.14% Divergence from 0.19% midpoint* Spot change YTD -5.29% Spot change since 2005 20.47% revaluation Key indexes: Item Current Previous Change Thomson 92.76 92.87 -0.1 Reuters/HKEX CNH index Dollar index 94.143 94.133 0.0 *Divergence of the dollar/yuan exchange rate. The S&P 500 .SPX lost 94.66 points, or 3.29 percent, to 2,785.68 and the Nasdaq Composite .IXIC dropped 315.97 points, or 4.08 percent, to 7,422.05.

Banks in China are now allowed to reduce the amount of cash held as reserves following a cut in Reserve Requirement Ratio (RRR) by 1% announced by the People's Bank of China (PBoC) yesterday.

China has retaliated with its own set of tariffs, and has accused the United States of launching the largest trade war in economic history. The losses in NY seeped into Asia, where Shanghai sank 3.7 percent, while Hong Kong lost 1.4 percent in the afternoon with property firms hit by expectations the city's banks will lift mortgage rates again as they track a likely Fed hike. The biggest decliners were technology stocks, which tumbled 1.18 percent.

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. Some analysts now expect a cut in the official policy interest rate to bring interbank lending rates down. "The narrowing interest rate differentials between China and the USA will exert more downward pressure on the RMB", wrote Nathan Chow, strategist at DBS Group Research. Still, tariffs could hurt the economy the longer they last. Earlier on Monday, the PBOC set the midpoint of the yuan's daily trading band at 6.8957 per dollar, its weakest level since May 11, 2017.

The yuan was also down, after the central bank set the reference rate at its weakest level against the USA dollar since May 11, 2017, and analysts expect the currency's weakening trend to continue.

Coming on the final day of the National Day holiday, the South China Morning Post says "the central bank's announcement may also serve as a shot in the arm for the China's stock market when trading resumes on Monday morning".

Vanessa Coleman

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