China cut the amount of cash banks must set aside as reserves ina bid to boost the supply of loans, as capital outflows andweakness at the nation's factories suggest a slowdown in theworld's second-largest economy is deepening.

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The reserve ratio will fall 50 basis points on Thursday, thePeople's Bank of China (PBOC) said on its website Wednesday. Thelevel will drop to 19.5 percent, based on previous statements,while some lenders to rural and small business get biggerreductions.

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The PBOC joins more than a dozen global counterparts in easingmonetary policy this year as tumbling commodity prices providescope to support growth. While Premier Li Keqiang told globalbusiness leaders last month not to worry about weakening Chinesegrowth, the latest step signals policy makers are concerned theslowdown has yet to reach bottom.

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“You have a lot of the world easing monetary policy in a contextin which inflation is going down, partly because of relatively slowgrowth and partly because of falling oil prices,” said EdwinTruman, a former Federal Reserve and U.S. Treasury official who'snow a senior fellow at the Peterson Institute for InternationalEconomics in Washington. China's latest move is “part of thatgeneral pattern.”

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Futures on the FTSE China A50 Index traded in Singapore surged5.1 percent as of 12:33 p.m. in New York, while contracts on HongKong's Hang Seng Index climbed 1.7 percent.

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The required reserve ratio, or RRR, reduction is the firstacross-the-board cut since May 2012. It will inject as much as 600billion yuan (US$96 billion) into the banking system, Australia& New Zealand Banking Group Ltd. economists estimate.

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“We expect at least four more reserve ratio cuts in 2015, inview of the prospect for further deceleration in economicfundamentals,” said Shen Jianguang, chief Asia economist at MizuhoSecurities Asia Ltd. in Hong Kong. He said the rising risk ofdeflation, weak factory and services readings, and an effectiveclampdown on stock-market speculation had helped trigger thecut.

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Last quarter, mired by a property slump and overcapacity, Chinasaw the biggest outflow of capital since at least 1998.

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To step up support for small companies, farmers and theagriculture industry, and major water projects, the PBOC announcedan additional RRR cut of 0.5 percentage point for city commercialbanks and non-county-level rural commercial banks that achievelending targets to small businesses. Agricultural Development Bankof China gets an extra cut of 4 percentage points.

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The PBOC will continue to implement prudent monetary policy, paymore attention to the balance between loosening and tightening, andguide stable and appropriate growth in lending and social financingwhile promoting healthy and stable operations in the economy, itsaid in the statement.

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Offensive Play

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The latest reserve-ratio cut “is a clear indication that Chinais on the offensive,” said Peter Rosenstreich, head of marketstrategy at Swissquote Bank SA in Gland, Switzerland. “2015 willsee a much more aggressive PBOC and government, which should keepthe yuan supported. This proactive strategy should also be positivefor regional Asia currencies and commodity prices.”

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China's leaders gather next month at an annual meeting, wherethey are anticipated to unveil a growth target of around 7 percent,down from “about7.5 percent” last year.

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The RRR move suggests a shift toward pro-growth policies thatmay fuel even more debt. An unprecedented lending spree in Chinafrom 2009 to 2013 led to a surge in credit on a scale that'striggered banking crises in other economies, according to theInternational Monetary Fund.

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The PBOC cut benchmark interest rates in November for the firsttime since July 2012, joining the European Central Bank (ECB) andBank of Japan in deploying fresh stimulus. While that lowered thecost of credit, a reserve-ratio cut boosts liquidity by allowingbanks to extend more credit.

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Price data has given scope for further monetary easing: Theproducer price index dropped 3.3 percent in December from a yearearlier, a record 34th-straight monthly decline. China hasbasically halted regular currency intervention, according to PBOCDeputy Governor Hu Xiaolian. That removes pressure to soak upliquidity, giving room for lower reserve requirements.

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The cut “releases liquidity 'permanently' and also has a strongsignaling effect, which should help improve market and businesssentiment,” Wang Tao, chief China economist at UBS Group AG in HongKong, wrote in a note.

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–With assistance from Xin Zhou in Beijing, Fion Li in Hong Kong,Christopher Condon in Washington, and Belinda Cao in New York.

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Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

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