What's going on?
It was Chinese stocks’ worst day in months on Monday. They fell by 4%, despite China’s central bank announcing it’ll effectively inject $109 billion into the economy.
What does this mean?
Most banks around the world work in a similar way. They have to keep a percentage of their total deposits on hold either with their central banks or in cash (known as fractional-reserve banking). In China, it’s currently 15.5% for large, commercial banks and 13.5% for smaller ones. The Chinese central bank said it’ll reduce those numbers by 1% next week, which means banks will get to loan out some yuan they’ve been sitting on. This might encourage businesses to borrow and invest in themselves more, thereby growing the economy.
It’ll be the fourth time this year that China’s made such a move. Meanwhile, the US central bank’s doing the opposite. It’s hiked interest rates three times this year, effectively mopping up some of the dollars out there.
Why should I care?
For markets: China’s economy gets served.
Investors are worried that the ongoing US-China trade dispute will hurt China’s economic growth. China’s counting on services to step in and reduce its reliance on manufacturing (which has been hit hard). Data released on Monday showed that its services sector (things like hospitality, warehousing, and financial services) grew in September. However, costs in the sector are up (squeezing companies’ profit margins) and employment is down – so things are looking a little wobbly.
The bigger picture: Don’t put China in a box.
China may be getting swept up in worries that emerging markets (EMs) might not be strong enough to weather a strengthening dollar. When the dollar is strong, EM countries’ dollar-denominated debts become more expensive (as their local currency buys fewer dollars). The Indian rupee fell to a lifetime low against the dollar on Monday – and EMs typically move together, so bad news for one is often bad news for all.