With China's economy cooling and the full impact of U.S. trade tariffs still to be felt, policymakers are shifting their priorities to reducing risks to growth, with the yuan and stock markets under pressure.
China's economic growth rate slowed slightly to 6.7 percent in the second quarter year-on-year, still well above the government's full-year target of around 6.5 percent. But some key activity indicators have weakened more sharply.
Fixed-asset investment is growing at the slowest pace on record, while non-performing loans surged in the second quarter and defaults climbed. The July nationwide jobless rate rose to 5.1 percent.
Smaller companies, in particular, are having a tough time securing loans and are grappling with rising borrowing and operating costs, fueled in part by a lengthy official clampdown on riskier lending like shadow banking.
The weighted average lending rate for non-financial firms, which reflects corporate funding costs, inched up 1 basis point in the second quarter to 5.97 percent, following a rise of 22 basis points in the first quarter and 47 basis points in 2017.
China's banking regulator has asked banks to significantly lower funding costs for smaller firms and raise their tolerance for non-performaning ratios for loans to small and micro firms.
China's politburo and state council have also replaced use of the term "deleveraging" with "structural deleveraging", a change that suggests less harsh curbs on debt.
"Liquidity is flush in the banking system. The key question is how to channel cash to the real economy," said Zhang Yiping, senior economist at Merchants Securities in Shenzhen.
"The external environment is becoming tougher and we cannot rule out further RRR cuts," Zhang said.
