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China cuts reserve rate to pump up economy

Attempting to pump life into its slowing economy, China's central bank will cut the amount of money commercial banks must set aside in reserve, a move that will put up to $174 billion into the economy.

The People's Bank of China will reduce the required deposit reserve ratio for lenders by 1 percentage point, effective Oct. 15, Xinhua News Agency reported Oct. 7, citing a same-day statement. The lower ratio will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

The reserve requirement ratio cut will release a total of 1.2 trillion yuan, 450 billion yuan of which will be used to pay back an existing medium-term lending facility that will mature Oct. 15. The remaining 750 billion yuan will be injected into the market, according to the central bank.

The central bank said it would maintain a prudent and neutral monetary policy, refrain from using a deluge of stimulus and focus on targeted adjustment. The move will not put downward pressure on the yuan, the central bank said, adding that it would continue to take necessary steps to stabilize market expectations and keep the foreign exchange market running smoothly.

The reserve requirement ratio cut is the fourth by the central bank this year, Reuters reported.

Beset by high levels of commercial and government debt, slowing consumer spending, and a simmering trade war with the United States, China's economy has shown clear signs of slowing in recent months. Infrastructure investments have slowed even as commercial default rates have risen.

Economist Zhang Ming, a researcher with the Chinese Academy of Social Sciences, said in a research note that he expects China’s GDP growth to slow to 6.6% in the third quarter, according to the South China Morning Post, down from 6.7% the second quarter, and to fall to 6.4% in the fourth quarter of 2018.

The trade dispute with the U.S. has heightened in recent weeks. China in September said it will take countermeasures after the U.S. announced a 10% tariff on $200 billion of Chinese goods.

The central bank's move comes as markets are set to re-open after the four-day National Day holiday. China's stock market has fallen by about 15% so far in 2018.

As of Oct. 5, US$1 was equivalent to 6.87 Chinese yuan.