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China’s RRR cut whets the appetite for easing

Rather than China's latest effort at targeted stimulus -- a reserve requirement cut for certain banks-- satisfying market calls for easing, it has instead spurred calls for more.

"Even with today's action, we continue to call for another RRR (reserve requirement ratio) cut," ANZ said in a note Monday.

Late Monday, the People's Bank of China (PBOC) announced a 50 basis point cut to the level of reserves for banks primarily lending to the agriculture and small-to-medium-sized firms. To prevent double-dipping, the latest RRR cut won't apply to banks included in the last targeted RRR cut in April.

Read More China's consumer inflation picks up in May

selensergen | iStock/360 | Getty Images

Part of the call for further easing may be due to the relatively small impact from the RRR cut, which analysts expect will push anywhere from 50-100 million yuan into the economy.

"Those targeted measures will only effect may be 10-15 percent of all the lending activity in China," Donald Straszheim, senior managing director at ISI Group, told CNBC. "They're a gesture (and) not really something materially going to move the needle."

Some analysts believe the needle really needs to be moved.

Read More Is China still growing too fast?

"We think that's not sufficient to support our reasonable growth," Hu Yifan, head of research at Haitong International, told CNBC. "The PBOC is somehow still delaying supportive policies," she said.

"The economy really needs a proper, right push at the right timing to support growth to stabilize the recovery status," she said, citing weak first quarter data and the market's low expectations for May data.

Read More What falling imports mean for China's economy

China's annual economic growth eased to 7.4 percent in the first quarter from 7.7 percent in fourth quarter, leading many economists to downgrade their 2014 growth expectations.

After years of double-digit growth, authorities intend to shift the economy from investment-driven growth to domestic-demand-driven growth amid concerns about excessive credit and overinvestment in some sectors. Many analysts are concerned that if the transition isn't handled well, China, which has the world's second-largest economy, could face an economic "hard landing."

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While Beijing's targeted measures have been attempting to choke off lending to sectors plagued by overcapacity, "it's better for the PBOC to cut for all of the banks rather than for the targeted banks because it's very hard to really control the flows of the money to the agricultural or micro firms," she said.

But some analysts believe a system-wide RRR cut is unlikely.

Read More Is China's growth slower because it's cleaner?

The expansion of targeted RRR cuts may raise the hope of upcoming universal RRR cuts, but we think the chance of those more aggressive moves could be quite small in the near term," Bank of America-Merrill Lynch said in a note Monday.

"An across-the-board RRR cut may only channel credit to local governments and SOEs (state-owned enterprises) which have soft budget constraints and some developers which might be too speculative," it said.

However, even without more RRR cuts, BofA believes other targeted stimulus measures will be in the offing as Premier Li Keqiang is "quite serious" about the 7.5 percent economic growth target for the year.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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