Reuters

China's central bank is moving to support the country's slowing economy through a new stimulus package as the trade war continues to escalate with the latest round of tariffs.

The People's Bank of China said it planned to slash how much capital banks were required to hold as reserves to its lowest level since 2007 in an effort to shore up economic growth.

The move is expected to free up as much as $126 billion for loans, with the first round of reserve cuts taking effect September 16.

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China's central bank is planning to inject a fresh round of stimulus into the country's slowing economy as it grapples with the impact from the latest round of US tariffs.

The People's Bank of China said it intended to cut how much capital banks were required to hold in reserves to its lowest level since 2007 in an effort to add liquidity the economy.

The PBOC said in a statement on its website on Friday that the required reserve ratio for all banks would be lowered to 0.5% on September 16. The central bank also said reserve requirements for some commercial banks would be lowered by 1% starting October 15 and November 15.

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The package is expected to free up as much as $126 billion for loans, which could be used to provide credit to smaller firms in an attempt to boost economic growth. This round of stimulus follows an effort in May that injected about $40 billion into the Chinese economy and a cut in January that freed up about $112 billion.

"The PBOC claims the cut is partly intended to keep liquidity conditions loose during the forthcoming tax season," Julian Evans-Pritchard, a senior china economist at Capital Economics, said in a note to clients on Friday.

He continued: "We think the PBOC's other stated goal — to lower borrowing costs for firms — is a more important driver of the move."

China's economy has been slowing down over the past year as the trade war with the US has continued to ramp up. Industrial output growth fell to a 17-year low in July as tariffs weighed on Chinese producers, and the impact is only expected to intensify with the recent round of US tariffs on another $112 billion worth of exports.

"Given that the headwinds to China's economy from weaker external demand and cooling property construction are likely to intensify in the coming months we doubt the PBOC will stop at just one RRR cut," Evans-Pritchard said in a note to clients on Friday.

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