The required reserve ratio for banks will drop by 0.5 percentage point on January 15 and a further 0.5 percentage point on January 25, the People's Bank of China said on its website. It cut the ratio for all banks, freeing up a net 800 billion yuan (£92 billion) after lenders use some of the 1.5 trillion yuan in liquidity released to pay back maturing medium-term loans.
The USD/CNH currency pair is expected to trade towards 6.60-6.70 as the US and China are increasingly likely to reach a trade deal by the March 1 deadline, according to the latest research report from Scotiabank. The world's two largest economies are reportedly set to hold trade talks in Beijing next week.
But Capital Economics said the policy change is "also meant to provide support to the economy and will be reinforced with further easing soon".
The government last week approved local governments to issue bonds worth 1.39 trillion yuan, made up of 810 billion yuan in the special objective bonds and 580 billion yuan in general bonds.More news: Fabregas insists his quality has not diminished ahead of expected Monaco move
China's economy grew at an annualized rate of 6.5 percent in the July-September period of 2018.
Still, economic growth is thought to have cooled to around 6.5 percent a year ago - which would be the weakest since 1990 - in line with the target but down from 6.9 percent in 2017.
The twisted and conditional liquidity support is part of the central bank's controversial plan to implement "targeted easing" which is aimed at ensuring funds will end up in hands of the right borrowers such as small factory owners.
"The move will offset liquidity fluctuations caused by cash injections before the Spring Festival this year, and will help financial institutions continue to strengthen support for small and micro businesses as well as private businesses", the central bank said.More news: Global stocks soar on dovish Fed, strong US jobs data
Further cuts in the RRR had been widely expected this year, especially after a spate of weak data in recent months showed China's economy was continuing to lose steam.
"There is room to cut the reserve requirement ratio, given the current relatively higher level compared with other countries", according to Mr Sheng, who said targeted monetary policy tools will be preferred to channel funds into the real economy.
Chinese financial stocks surged Friday as Premier Li Keqiang visited the nation's biggest banks and pledged more support for the economy.
China's manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016.More news: Trump offers Congressional leaders meeting as shutdown grinds on