Money will be channeled especially for lending to small and micro firms

China's central bank is expected to release more capital into financial institutions, to ensure ample funds are lent to local governments－the key measure to strengthen investment and stabilize economic growth in the coming months, analysts said.

The market expected an overall cut in the reserve requirement ratio (RRR) possibly as soon as this weekend. The last time when the central bank announced a full-scale RRR cut was in January.

The money to be released from the financial institutions will support economic growth, especially for lending to small and micro enterprises, when external uncertainties remain amid trade disputes with the United States, economists said, after a meeting held by the State Council on Wednesday.

The People's Bank of China, the central bank, may follow the State Council's proposal and implement the RRR cut later this month, said some analysts.

A total RRR cut of 1 percentage point is likely before the end of this year, according to a report from Nomura Securities.

Given a 1 percentage point blanket RRR cut, the central bank would inject 1.5 trillion yuan ($210 billion) worth of liquidity into banks, the report said. If the central bank only rolled out a targeted RRR cut of 1 percentage point for small and medium-sized banks, it estimated an injection of about 720 billion yuan of liquidity.

More importantly, the capital injection through a broad cut of RRR will supplement liquidity in financial markets, maintain a lower interest rate level, and provide enough funds for financial institutions to purchase bonds issued by local governments, said Ming Ming, an economist with CITIC Securities.

Local government special bond, a type of debt not on the balance sheet but is usually used for infrastructure financing, is seen as the major tool in the coming months to stabilize investment. As the total bond issuance quota will be used up by the end of this month, the State Council required pre-approval of a portion of the 2020 quota for local government special bond issuance while expanding the range of investment projects.

Funds raised via local government special bond should be ready at the beginning of 2020, which can be investment in a broader range of projects including railway, parking lots, the natural gas pipeline network and vocational education. But some projects, such as land reserves and property development, will be prohibited, according to a statement after the State Council's meeting.

Besides, targeted RRR cut was also mentioned by the top-level meeting, although the basic policy tone of "prudent" had never been changed.

The current RRR for the six largest State-owned banks stood at 13.5 percent. For the medium-sized banks, the ratio is 11.5 percent, and it is 8 percent for the rural commercial banks.

The central bank cut the RRR for rural commercial banks in May, which has released 300 billion yuan to leverage more lending to small and private companies, according to the PBOC.

From May to July, banks issued about 840 billion yuan in new loans to small and private companies, with a lending rate 0.3 percentage point lower than the average level in the January to April period, said Sun Guofeng, director of the PBOC's Monetary Policy Department.

"Given domestic and external headwinds, more policy easing is needed to convincingly stabilize economic growth," said Louis Kuijs, Head of Asia Economics at Oxford Economics, a British think tank.

"The macro policy stance was shifted to be more decisively pro-growth. Fiscal policy turned expansionary, with advancement of infrastructure spending and substantial cuts in value-added and personal income taxes. Monetary policy was also eased further, with additional steps to expand liquidity and spur bank lending," he said.