Increased liquidity expected to help economic growth
China's central bank announced it was lowering the amount of cash that all financial institutions need to reserve starting on Monday.
The move will release liquidity of at least 1.2 trillion yuan ($197 billion) to support economic growth.
It is the second reserve requirement ratio cut in three months. The one percentage point drop was the largest since November 2008.
An extra 1 percentage point cut in the ratio will be given to commercial banks for agricultural services and an additional reduction of 2 percentage points to the Agricultural Development Bank of China, the People's Bank of China said.
It will further lower the ratio by 0.5 percentage points for eligible banks that lend a certain amount of money to agricultural borrowers or to small and micro businesses.
This change is expected to lift the stock market on Monday after the benchmark index hit a seven-year high last week, said Zong Liang, an economist at Bank of China International.
Lu Zhengwei, chief economist at Industrial Bank, commented that the cut was "inevitable" but "a little bit late", as the funds outstanding for foreign exchange have continued to drop since April last year, which means market liquidity has actually tightened.
Cutting the reserve requirement ratio is more effective in reducing loan costs for industrial companies than decreasing the benchmark interest rate, Lu said.
Commercial banks' lending costs for new loans are higher than industrial profit in recent months, according to economists, especially in March when the growth in industrial output declined to a post-crisis low of 5.6 percent, down from 6.8 percent in the first two months of the year and from 7.9 percent in December.
Dragged down by the sluggish manufacturing production and historic low for fixed-asset investment in the first quarter, China experienced a six-year low in GDP growth.
Zhou Xiaochuan, the country's central bank governor, said on Saturday that China still has scope to further ease monetary policy.
