The People's Bank of China said it would lower the reserve requirement ratio at county-level rural banks by 200 basis points from Friday, but some analysts cautioned that adding liquidity too fast could cause a rise in financial risks.
The targeted fund easing was a small step to bolster rural development after the State Council announced the decision last week.
Analysts were split. Some believe it signals further easing to come as economic growth cools, but others say the move reduced the chance for a broad-based reserve ratio cut for nationwide banks in the near term.
The central bank said yesterday it would also cut the ratio for county-level rural credit co-operatives by 50 basis points, but added the prudent monetary policy stance would not change and that the adjustment "wouldn't affect the overall liquidity in the banking system".
Bank of America Merrill Lynch's Lu Ting said the macro impact of the cut would be small.
As of end-2013, deposits of rural commercial banks and rural co-operative banks were at 7.8 trillion yuan (HK$9.7 trillion), a tiny fraction of total deposits held by the banking sector at 104 trillion yuan, Lu said. Even assuming the cut is applied to all the 7.8 trillion yuan rural deposits, a 100 basis-points cut would release only 78 billion yuan, he said.
The latest step "should not be read as a signal of a broader shift towards monetary loosening" as another credit-fuelled rebound would hurt China's long-term growth potential, said Capital Economics.
China's economy expanded 7.4 per cent in the first quarter, the slowest expansion since 2012 and down from the 7.7 per cent growth in the previous quarter.
Huarong Asset Management chairman, Lai Xiaomin, told an internal meeting that banks' non-performing loans had "risen significantly" since the start of this year.
Daiwa Capital Markets analyst Grace Wu said the bad loan ratio in the banking sector may rise to 2 per cent by the end of 2016.
The bad loan ratio at the 10 largest publicly traded banks on the mainland rose 0.06 of a percentage point to 0.99 per cent last year, according to PricewaterhouseCoopers.
Lawmakers are amending the country's budget law seeking to ease barriers for local governments to issue debt directly.