DOES CHINA HAVE ENOUGH MONEY TO SAVE ITSELF?
China has injected $100bn of liquidity into the country’s financial system and cut interest rates to records lows in a "shock-and-awe" bid to restore confidence, but worries persist that even this may not be enough to avert a crunch as capital flight surges.
The move came as the authorities abandoned their futile efforts to shore up the stock market, allowing the Shanghai Composite index of equities to plummet by a further 7.6% yesterday (8/25). It has tumbled by 22% in the past four trading days.
The central bank (PBOC) cut the reserve requirement ratio (RRR) for lenders by 50 basis points to 18%, freeing up roughly $100bn of fresh funds. It also cut the one-year lending rate by 25 points to 4.6%. It may not be enough to add any net stimulus to the economy.
The PBOC has intervened heavily on the exchange markets to defend the yuan, drawing down reserves at a blistering pace. The unwanted side-effect is to tighten monetary policy. It is a textbook case of why it can be so difficult for a country to deploy foreign reserves – however large on paper - in a recessionary downturn.
The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash.




