Reserve requirement ratios (RRRs) - now 14.5 percent for large institutions and 12.5 percent for smaller banks - will be lowered by a total of 100 basis points (bps) in two stages, the People's Bank of China (PBOC) said.
The reserve requirement ratio refers to the percentage of cash that financial institutions are required to place in the central bank as reserves, against the amount of deposits they hold.
Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, while urging banks to take full advantage of tools including reserve ratio cuts, and to support private and small businesses' financing needs.
The move by the People's Bank of China, the first of the new year, is seen as a means to help reduce the risk of a sharper slowdown in the world's second-largest economy, where recent data has been softening. China International Capital Corp said that may release as much as 400 billion yuan of liquidity. Zhang Yu, a research director at Huachuang Securities, thinks there could be an RRR cut in mid-January.
According to a survey released by the PBOC on Christmas Eve, in the fourth quarter 81.2pc of the participants from the banking sector said the current monetary policy is "appropriate", 4.1 percentage points higher than in the third quarter.
The cuts will be effective January 15 and January 25, ahead of the long Lunar New Year celebrations when cash conditions often get tight.
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The announcement comes as concerns are growing over the effects of the trade conflict with the United States on the country's economy.
But the central bank said growth was still within a reasonable range and it would continue to implement a prudent monetary policy, without engaging in massive stimulus. It also highlighted maintaining market liquidity at a reasonably ample level.
A further deceleration is seen this year, with some analysts forecasting growth will cool to almost 6 percent, which would mark China's weakest expansion since 1990.
Economists believe the government could take more fiscal steps by cutting taxes and boosting spending on infrastructure, amid expectations that the budget deficit ratio could be lifted to 3 percent in 2019 from 2.6 percent past year. Corporate tax payments and maturities of lenders' interbank debt will also mop up liquidity, prompting authorities to step up cash injections.
The government maintains last year's economic growth will be on target at around 6.5 per cent, slowing from 6.9 per cent in 2017.