Beijing's move to cut the amount of funds banks must hold in reserve is expected to unleash 396 billion yuan (HK$483.6 billion) into the financial system and improve the profitability of lenders.
The People's Bank of China said on Wednesday it would lower the so-called reserve requirement ratio by 50 basis points on Monday. After the cut, the ratio will be 21 per cent for large banks and 19 per cent for smaller ones.
The first reduction since December 2008 follows 12 increases in the past two years and signals further monetary easing down the road as the mainland grapples with an economic slowdown amid the worsening euro-zone debt crisis.
Mainland banks are expected to benefit from further reserve reductions next year with more funds available for lending, which would help boost investor sentiment in capital markets.
Bank shares rallied in Hong Kong yesterday, with Industrial and Commercial Bank of China rising 10.67 per cent, Bank of China 10.37 per cent, Agricultural Bank of China 8.97 per cent and China Construction Bank 5.7 per cent.
Banks also rose on the mainland markets, after being shunned for months because of their exposure to bad loans from local government financing vehicles, property developers and exporters.
'The cut would help increase the likelihood of a soft landing for China's economy, thus reducing non-performing loan pain in this economic adjustment process,' said May Yan, a Barclays Capital analyst.