China's central bank announced Sunday it would reduce the reserve requirement ratio (RRR) for most banks by 50 basis points to free up funding for small firms as a trade war with the US looms.

The move to cut the amount of cash banks must hold in reserve will free up a combined 700 billion yuan ($108 billion) in funding at commercial banks and the largest state-owned banks, the People's Bank of China said in a statement.

The policy is set to come into effect on July 5, one day before new US tariffs are due to be imposed on Chinese imports worth $34 billion. Another $16 billion is targeted for future duties.

The prospect of tariffs combined with lacklustre economic data last month prompted China's central bank to respond, analysts say.

"It sends a strong signal of policy easing on the part of the State Council (cabinet) and the PBoC," said Ting Lu, chief China economist at Nomura investment bank, in a note.

"We believe the Chinese economy is yet to bottom out and the situation could get worse before getting better," said Lu.

Banks will use funds freed up from the RRR cut to finance small businesses and support "debt to equity swaps", the central bank said.

Regulators have been pushing for debt to equity swaps to lessen the financial burden on many of China's highly indebted companies. But so far the swaps have yet to be widely carried out.

First Published:Jun 24, 2018 7:22 PM IST