HONG KONG  - China is dropping hints of trade pain ahead. The central bank said late last week that it would slash the amount lenders need to hold in reserve, freeing up a net $117 billion. An easing move on the eve of talks with Washington’s envoys signals U.S. President Donald Trump may be right: the country’s economy is weakening, and with it, Beijing’s negotiating position.

While a cut in the reserve requirement ratio, China’s fifth in a year, was not surprising, the 100-basis point shift that started off 2019 was larger than anticipated. Of course, demand for cash tends to spike around this time of year, due to both the Chinese New Year holiday and tax deadlines, but the economy is cooling uncomfortably fast. Official figures may show growth slowed to 6.3 percent in the fourth quarter, Standard Chartered reckons.

Friday’s announcement adds to other easing measures: People’s Bank of China officials last month announced a new policy tool to encourage lenders to disburse their cash more widely. The “targeted medium-term lending facility” will make cheaper funding available to banks that the PBOC judges to be doing their part by lending more to small companies.

It’s certainly not full-blown monetary stimulus yet; the central bank has not fired its heavier artillery, such as a benchmark rate cut. The market has also been kept waiting for reductions to cost of borrowing from the PBOC’s more important channel, its regular medium-term lending facility.

But the overall direction of travel is clear, and both recent moves point to structural issues that worry pessimists: the extra liquidity pumped into the system does not seem to be translating into more loans for smaller companies, which may signal deeper problems with capital allocation, not to mention the private sector’s nervousness about politics in 2019.

All of this is bad news for Beijing’s trade negotiators, when they hold talks with U.S. counterparts face-to-face this week. As the pain mounts, they may be pushed to yield more in order to gain relief. They could, for example, agree to formally drop the controversial “Made in China 2025” plan, or to announce concrete measures to beef up enforcement of intellectual property rights.

Trump said on Sunday that weakness in China’s economy will push officials to negotiate. He may be right.

CONTEXT NEWS

- The People’s Bank of China said on Jan. 4 that it would reduce the amount of capital banks need to hold as reserves by a total of 100 basis points. The cut will be implemented in two stages, effective Jan. 15 and Jan. 25. The PBOC said it estimates the move, the fifth in a year, will release a net 800 billion yuan ($117 billion) of liquidity.

- The central bank in December introduced a new policy tool, the targeted medium-term lending facility, to offer cheaper funding aimed at encouraging banks to lend to small and private companies. The one-year interest rate will be 15 basis points lower than that of the existing medium-term lending facility.

- The United States and China are due to hold mid-level trade talks in Beijing on Jan. 7 to 8. U.S. President Donald Trump said on Jan. 6 that a downturn in China’s economy “gives them a great incentive to negotiate”.

(Editing by Clara Ferreira Marques and Katrina Hamlin)

© Reuters News 2019