"The RRR cut today will immediately inject about RMB650billion ($A138 billion) into the banking system alleviating the liquidity drain," he said.

"Capital outflow pressures may persist in 2016 on the back of yuan depreciation expectations and the commencement of the US Federal Reserve's policy rate normalisation. Thus, we expect that the PBOC may further lower the RRR in 2016, depending on the actual situation of the capital flows."

China saw its foreign reserves decline by $US99 billion ($138 billion) in January, despite running a hefty current account surplus, suggesting the economy is experience significant capital outflows.

This is a function of the weak stock market (the benchmark CSI300 fell by 2.4 per cent on Monday) and slowing economic growth.

Economic growth target

China is expected to unveil an economic growth target of between 6.5 per cent and 7 per cent for 2016, when the National People's Congress begins in Beijing on Saturday.

China reported growth of 6.9 per cent in 2015, the slowest pace in 25 years.

The widely anticipated move to cut the RRR comes after PBOC Governor Zhou Xiaochuan said on Friday there was still room to loosen monetary policy.


"China still has monetary policy space and tools to avert downside risks," Mr Zhou told a conference prior to the G20 meeting in Shanghai.

Mr Zhou said China's economic fundamentals remained strong and recent data pointed to "positive signs for growth in 2016."

The governor also stressed government spending or fiscal policy would remain "proactive" to support growth in 2016.

Speaking in English, Mr Zhou twice stressed "there was no basis for persistent RMB [yuan] depreciation", delivering a strong message to hedge funds betting on a large one-off devaluation of the currency.

"Short term volatility will give way to long term fundamentals," he said.

The governor also stressed the pace of currency reform would continue and the government would not be swayed by recent market volatility.

"The pace may vary but the reform will continue," he said.

