Performance of the indicators all point to the need for imminent monetary easing. The depreciation of the yuan over the past two months has further tightened domestic liquidity, as evidenced by both falling PBC FX purchases, and the PBC's resumption of reverse repo for liquidity injection in recent weeks.

Data from SAFE confirmed that China's capital and financial account saw a US$91bn deficit in the fourth quarter. Deflation risks are becoming more real with falling inflation raising the real interest rate and debt burden.

The sharp and persistent decline in growth of narrow money supply (M1) is an important indicator to gauge the risks. Data releases on Feb. 10 could show that the PPI deflation had widened -3.5-4 percent from -3.3 percent, and that CPI inflation could have slowed towards 1 percent in January (partly due to the distortion given the timing of the Chinese New Year). Industrial profits released last week showed an 8 percent contraction in December, while the January official PMI released on Feb. 1 shows a decline to below 50, for the first time since 2012. Meanwhile the recent equity market correction and the regulations on margin trading offer space for rolling out the RRR cut.

After the RRR cut, some small and medium enterprises will be able to get more money from banks and the market to help them develop further. In addition, specific industries such as the agricultural industry will benefit too because the RRR cut in this time is a combination of a RRR cut across the board and a targeted RRR cut.

The result of this RRR cut is increasing liquidity and maintaining the money supply at a certain level at the same time in order to avoid serious market fluctuations. This method would be beneficial to China's economic transformation.

The writer is Lecturer of Beijing International Studies University, and a columnist with China.org.cn. For more information please visit: http://www.h5a3.com/opinion/YuNing.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.