(Yicai Global) Jan. 7 -- The decision by the People's Bank of China to reduce the reserve requirement ratio by 1 percentage point for commercial banks last week was the prologue to an easy money policy, according to a former member of the PBOC's monetary policy committee who believes that more cuts could be coming this year.

The move shows that the policy thinking put forward at the year-end Central Economic Work Conference is becoming a reality bit by bit, Xia Bin, who is now a counselor to China's cabinet, told Yicai Global. Officials at the conference agreed China would maintain its prudent policy and would keep it "neither too tight nor too loose," while ensuring market liquidity remained reasonable ample.

A relatively loose monetary policy is the plan this year -- that is quite clear, Xia said, adding that Beijing hopes to stabilize the economy and make counter-cyclical adjustments.

Jiang Chao, chief economist at Haitong Securities, believes there is room for the central bank to reduce the required reserve ratio further, and Morgan Stanley China's Chief Economist Xing Ziqiang forecast just how far those cuts could go, suggesting the PBOC will slash the RRR by another 300 bips.

Easy Money

"The RRR cut last Friday worked for all financial institutions," said Evergrande Group's Chief Economist Ren Zeping. "It was stronger than the last four times and a powerful indication of easier monetary policy."

The four cuts last year tallied just 2 percentage points, just double last week's reduction, he added, saying the latest change injected about CNY800 billion (USD117 billion) into the market -- more than any of 2018's adjustments.

"The cut may improve the financing environment for the real economy and reduce financing costs," Ren said. "The PBOC's monetary policy focuses on China's goal of stabilizing economic growth and supports financing for private companies and smaller firms."

He believes the main reasons behind the latest reduction were increased economic fluctuation, the rising risk of deflation and seasonal factors. The recent decline in American stocks has also provided a window for China to slash the ratio, he added.

Acting Fast

The Chinese New Year, which is based on the lunar calendar so changes dates each year, happens in early February this year, he added, saying that January is typically a tough time to borrow and the liquidity gap could rise as high as CNY3.8 trillion (USD555 billion) this month. 

The latest RRR cut does not provide enough liquidity to counter that, so it is quite possible the central bank will decrease the rate further before the week-long holiday, added Song Xuetao, a macro economy researcher at Tianfeng Securities. He predicts a reduction of another half or whole percentage point before the break, and a total cut of 2 percentage points throughout the year.

Editor: James Boynton