China's central bank made a system-wide cut to bank reserve requirements on Wednesday, thefirst time it has done so in over two years, to unleash a fresh flood of liquidity to fight off economicslowdown and looming deflation.

The announcement cuts reserve requirements - the amount of cash banks must hold back fromlending - to 19.5 percent for big banks, a reduction of 50 basis points that would free up 600billion yuan ($96 billion) or more held in reserve at Chinese banks - which could then inject 2-3trillion yuan into the economy after accounting for the multiplying effect of loans.

"The central bank has tried to use short-term policy tools to inject more liquidity, but such toolswere not enough, so it has to cut RRR," said Wen Bin, senior economist at Minsheng Bank inBeijing, adding that signs of increasing capital outflows and a sliding domestic currency wereparticularly worrying.

The reduction follows a surprise cut to guidance lending rates by the People's Bank of China(PBOC) in November, but that adjustment had negligible impact on spurring productiveinvestment, so many had predicted the more dramatic move that the central bank has nowdelivered.

"Today's announcement isn't a surprise," wrote Mark Williams of Capital Economics in aresearch note reacting to the news.

"It is consistent with the more accommodative stance being taken since the benchmark interestrate cut."

Officials had previously said they would wait for fourth quarter data to be released beforedeciding on further easing measures, and that data gave little cause for comfort.

An official survey of China's mammoth factory sector, the purchasing managers index (PMI),showed it shrank unexpectedly for the first time in nearly 2-1/2 years in January, and otherindicators have also been worrying, including signs of strengthening capital outflows and aweakening in China's service sector.

"The main reason was that the PMI was much lower than expected in January, so if there is nofurther policy reaction, it's very likely that China's Q1 GDP growth could fall below 7 percent," saidLiu Li-gang, an economist at ANZ.

Policymakers had previously signalled that they were comfortable with slowing net growth in thename of economic restructuring away from capital-intensive manufacturing toward services, but ifrestructuring attempts set off an economy-wide slide, Beijing would find its options increasinglyconstrained.

External factors contributed to the timing of the decision, economists said, such as deflationarypressures from a recent collapse in energy prices and easing moves by other foreign centralbanks, though domestic issues were still more important.

"The recent wave of central bank easing may have played a role, but we think the abovedomestic factors are the main reasons behind the RRR cut today," wrote Zhu Haibin of J.P.Morgan, adding that the timing was not surprising, given rising systemic cash demand in the run-up to the week-long Chinese New Year holiday in mid February.

However, the weak impact of previous stimulus measures has some worried that liquidity toolsare losing their effectiveness in China, given that the volume of debt required to produce a unit ofGDP is steadily rising, given endemic industrial overcapacity and entrenched economicinefficiencies in the state sector.

The bank injected an estimated 644.5 billion yuan into the system through medium-term loanfacilities in late 2014, without producing much in the way of stimulation, and swamping thesystem with money it cannot digest carries other risks.

Previous easing moves are already credited with setting off a massive leverage-fuelled rally inChinese stock markets, which has become as much a cause for concern as celebration, as ithighlights the risk that easing would simply reinflate asset bubbles in stocks, real estate andindustrial housing that regulators have been trying to let the air out of for years.

China's economic growth slowed to 7.4 percent in 2014 - the weakest in 24 years - from 7.7percent in 2013.

Analysts polled by Reuters in January expect economic growth to sag further this year to around7 percent.�