Is more aggressive monetary stimulus on the way for China?

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China's decision to lower the reserve requirement ratio (RRR) for some county-level rural commercial banks late Wednesday has led investors to question whether broader monetary stimulus is in the offing.

Following the release of softer-than-expected March activity data, the State Council announced that it was cutting the amount of cash that village commercial lenders must hold as reserves in an effort to increase financial support for the agricultural sector. It did not specify when or by how much the RRR would be cut, saying only that an appropriate reduction would be made for qualifying banks.

"We don't expect the amount of liquidity released to be significant for the economy. Nonetheless, this is another loosening signal from the government, which suggests it is probably more concerned about the economic outlook," Zhiwei Zhang, chief China economist at Nomura wrote in a note.

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"We continue to expect the government to cut the RRR for the whole banking sector in May or June," he said.

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Decreasing the reserve requirement ratio tends to stimulate economic activity as lenders have more assets to loan out. The central bank last cut its reserve ratio for all banks in May 2012. It now stands at 20 percent, near its record level of 21.5 percent in 2011 amid an aggressive monetary tightening cycle.

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Ting Lu, chief China economist at Bank of America Merrill Lynch said the case for a universal RRR cut - which merely increases interbank liquidity - is "quite weak" as money market rates remain low.

The 7-day repo rate - viewed as a key gauge of confidence to lend in the interbank markets - stands at 2.7 percent - far below the 10-plus percent levels seen last June amid a severe liquidity strain in the economy.

Yu Song, economist at Goldman Sachs agrees the likelihood of a system-wide cut remains low.

"The cut in RRR for certain county-level rural banks might be viewed as the rumored RRR cut coming true. But this is an extremely limited targeted loosening as rural commercial banks are a very small part of the overall financial system," Yu said.

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"Further very limited and targeted cuts similar to today's cut may happen, but we believe the impact on the overall economy will be too small to be meaningful," he said.

Nevertheless, the bank expects further policy measures to be rolled out in the coming weeks until there are clear signs that the economy is on a stronger footing.

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China's economy registered growth of 7.4 percent in the first quarter, slowing from 7.7 percent in the previous three months, but beating market expectations of 7.3 percent. Data released alongside the gross domestic product (GDP), showed industrial output and asset investment for March underperformed market expectations.

"We expect these measures will provide support for short-term domestic demand growth in the coming months. We continue to expect second quarter sequential growth to be stronger than first quarter as a result of these loosening measures and the seasonal dissipation of the impact of the anti-corruption campaign," Yu said.