China's central bank on Sunday decided to lower the reserve requirement ratio (RRR), the minimum level of reserves banks must hold, by one percentage point effective from Monday.
The move aims to "boost structural adjustment," the People's Bank of China (PBOC) said, adding it will give an additional one-percentage-point RRR cut to banks engaged in lending to small firms, the farming sector and major water projects.
The Agricultural Development Bank of China, the sole policy lender for agriculture, gets an RRR reduction of 2 percentage points.
The central bank will further lower RRR by 0.5 percentage point for state-owned banks and joint-equity commercial banks that have met the authority's criteria for lending to agricultural sector or small- and micro- enterprises, though the central bank does not specify what constitutes the criteria.
This is the second time that the central bank has adopted an across-the-board RRR cut plus targeted cuts following a similar move on Feb. 4.
After the latest change, big banks must hold 18.5 percent of their deposits in reserve. According to estimates by some Chinese institutions, the RRR cut could free up 1.3 trillion yuan (212.2 billion U.S. dollars) into the real economy.
Sunday's RRR cut was within market expectations following lackluster economic performance in the first quarter.
Xu Hongcai, director of the Department of Information under China Center for International Economic Exchanges, considers the move "timely."
China's gross domestic product (GDP) growth slowed to 7 percent in the first quarter from 7.3 percent in the final three months of last year, marking the worst result in six years and indicating continuing downward pressure on the economy.
Though the growth in the first quarter met the official target of around 7 percent for 2015, the slowdown in several areas, including industrial output and retail sales, has caused concern.
Exports, one of the three traditional drivers of the Chinese economy, fell 15 percent year-on-year in March.X Besides the RRR cuts, the PBOC has lowered benchmark interest rates twice since November as the economic growth last year moderated to 7.4 percent, a 24-year low.
Lu Lei, head of PBOC's research department, expects lower financing cost for enterprises as the RRR cut means banks will have more low-cost cash at their disposal.
Statistics showed that the financing cost for enterprises at the end of March stood at 6.83 percent, down 50 basis points from the same period last year and down 12 basis points from the end of the last year.
"However, the real financing cost remains at a high level, given the fact that China's producer price index (PPI) in March actually slid 4.6 percent," Lu said.
Lu said that China will continue with the prudent monetary policy, with special emphasis on fine-tuning as well as striking a balance between tight and loose.
Taking into consideration measures such as cuts in interest rates and RRR as well as recent policies to bolster the sagging housing market, Xu expects that China's economy will stabilize in the second quarter and tick upward in the third.
