A cut would be triggered if growth slips below 7.5% and towards 7%, they said, and would come on top of money market operations and currency intervention via state banks that traders say has already loosened monetary conditions.
Apart from supporting a stumbling economy, the stronger action of cutting bank reserves would provide a cushion against any shocks from financial reforms that the central bank is widely expected to push through this year, including a widening of the yuans trading band to give the currency more room to rise or fall each day and allowing banks more room to set deposit rates.
The economy faces big downward pressure, said a senior economist with the State Information Centre, a top think-tank affiliated to the National Development and Reform Commission, the countrys top economic planning agency.
Cutting RRR is likely if economic growth slows further. But they may still need to wait and see the first-quarter economic data, said the economist, who requested anonymity due to the sensitivity of the matter. The RRR is the reserve requirement ratio, the official name for bank reserves.
The concern is that the financial reforms could weigh on an already slowing economy, so the central bank will be prepared to free up some cash by cutting bank reserves if need be to give the economy support, the sources at top government think-tanks said.
Private economists have suspected that the central bank might be willing to cut the RRR, but the sources provided the first confirmation that the central bank is discussing such an option. Since May 2012, major banks have had to keep a fifth of their cash as reserves.
Most of the top think-tank economists believe the central government would lean on fiscal policy to do its part to support growth, repeating the mini-stimulus seen last year when Beijing made targeted infrastructure investments, among other measures.
Trade data last weekend shook markets globally by showing an unexpected fall in exports in February of 18% compared with a year earlier. Purchasing managers indexes this year have suggested growth in factory-sector activity for years the engine of Chinas economy is stalling.
Chinas consumer inflation hit a 13-month low of 2% in February, a sign that slowing growth rather than rising prices poses a bigger risk to the economy. However, taking these figures as a clear indicator of the economys health is difficult because data for the first few months of the year is distorted by the Lunar New Year holidays.
While financial markets have taken the data at face value to suggest the economy is struggling, some economists say a clear picture will not emerge until data for March is published. And that data will not be released until the middle of April.
Still, other private-sector economists say the actions of the central bank in letting interest rates fall and the yuan decline has been in effect a policy easing, perhaps suggesting the central bank is concerned about the economys health.
The weighted average of the benchmark seven-day repo stood at 2.26% earlier on Tuesday. Average rates have not been so low since 2012. The yuan has fallen sharply since the middle of February and dropped the most on Monday since April 2008.
Analysts believe the PBOC is conducting a short-term attack on speculators, who have been pouring money into China to cash in on what was a steadily rising yuan and high-yields on debt. But the measures also loosened monetary conditions.
Its like killing two birds with one stone, said Zhao Xijun, an influential economist at Renmin University in Beijing.
Some of the sources said cutting bank reserves would help to offset capital outflows if money starts moving offshore either in reaction to the central banks attack on speculators or if it later widens the trading band of the currency. Most expectations point to the band being doubled in scope to 2% either side of a daily trading reference point set by the central bank.
A time window for yuan reform to increase two-way fluctuations has arrived and I believe the central bank will seize the opportunity, said a former central bank researcher, who now works for a think tank and is involved in the policy conversations.