BEIJING - Liquidity injection by the central bank through a larger than anticipated reserve requirement ratio (RRR) cut is expected to buttress the banking, housing and farming sectors.
On Monday RRR was slashed by 100 basis points, the second cut this year and the biggest reduction since November 2008, the height of the global financial crisis.
Economists estimate the cut will unfreeze around 1.2 trillion yuan ($196 billion) as financiers are allowed to hold less reserves.
The policy could preempt liquidity tensions for banks, many of which are already struggling with shrinking loanable funds, said French bank Societe Generale in a research report.
Due to initial public offerings and the strong stock market performance in recent months, liquidity has been diverted away from the banking system and the bond market to the much higher returns offered by equities.
A deposit insurance program will be formally implemented on May 1, and the first premium payment by banks is very likely to take place soon, which will further drain liquidity.
The benchmark one-week Shanghai Interbank Offered Rate (Shibor), which measures the cost at which Chinese banks lend to one other, rose substantially in the first quarter of 2015, indicating a money crunch in the banking system.
"This massive injection will surely exert meaningful downward pressure on interbank rates, which should provide the incentive to price loan rates more attractively," noted Societe Generale.
One week Shibor dipped 11.2 basis points for the second day on Tuesday to 2.62 percent.
Fan Jianping, chief economist at the State Information Center, said the RRR cut means more loanable funds, lower interest rates, which will consequently benefit home developers.
"Easier mortgage loans at better rates will prompt home purchases, so that capital-strapped developers can cash in," said Fan, adding that property investment is likely to rebound with improving home sales.
Property investment in China grew 8.5 percent in the first quarter of 2015, slowing sharply from an increase of 16.8 percent in the same period last year.
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