Tim Hornibrook : China appears to blink in trade confrontation with the US

There’s a whiff of fear in the air in China as escalating trade frictions with the US begin to impact on an economy that had its own pre-existing issues.

Returning after a week-long national holiday, China’s stock markets and its currency were rattled on Monday by the People’s Bank of China’s (PBoC) weekend decision to inject liquidity into the banking system for the fourth time this year, a signal of the central bank’s concerns about the vulnerability of the economy.

The Shanghai Composite index fell nearly 4 per cent and the Hong Kong market was down nearly 2 per cent. The renminbi was about 0.4 per cent weaker against the US dollar.

The PBoC announced a 1 per cent cut in banks’ reserve requirements at the weekend. In effect, it released about $US175 billion ($247 billion) of cash into the banking system, although it directed some of that to be used to refinance maturing short-term bank funding. The net injection of liquidity into the economy via increased bank lending is about $US109 billion.

Last month, the Trump administration slapped tariffs on $US250 billion of China’s exports to the US, with the threat of another $US267 billion to come if China retaliated, which it has. If the second tranche of the tariffs is imposed, all China’s exports to the US would become more expensive and less competitive.