Jun. 6 - The depressing picture painted by China's recent economic data has encouraged some economists to call for the use of monetary levers to increase bank credit and stabilize economic growth.

Some policy watchers expect a cut in the commercial banks' reserve requirement ratio by at least 50 basis points, as well as a reduction in benchmark interest rates of 0.25 percentage points by the end of this month.

Other economists close to the government suggested that monetary policy easing could be more selective, by lowering the lending rate, promoting market-based interest rate reform and injecting liquidity into the capital market.

In the second half of this year, China is expected to enter into a period of consecutive RRR cuts, said Ba Shusong, a senior economist with the Development Research Center of the State Council.

"It is likely that in the next one or two years the central bank will need to continually reduce the RRR to boost market liquidity, as yuan holdings for foreign exchange purchases may decrease thanks to gloomy exports amid weakening global economic growth," Ba said.

China started a cycle of RRR cuts last December, which has released about 400 billion yuan ($63 billion) into the capital market, after three years of monetary tightening.

So far this year, the People's Bank of China has cut the RRR twice, in February and May, to help cash-strapped companies, especially smaller firms.

Last year, the central bank raised the RRR six times to 21.5 percent and increased interest rates three times. The current one-year deposit rate is 3.5 percent, while the lending rate is 6.56 percent.

"I don't agree with a general decrease in interest rates as inflationary pressures still exist, and the problem of excess production capacity is very obvious now," said Ba.

He suggested lowering the fluctuation limit of the minimum credit rate to 70 percent of the benchmark rate from the current 90 percent, which would decrease companies' borrowing costs and satisfy their credit demand.

The latest economic indicator - the official purchasing managers' index - pointed to deteriorating conditions in the manufacturing sector.

The figure sharply dropped to 50.4 last month from 53.3 in April, approaching the 50 mark that separates expansion from contraction.

"The manufacturing industry is under pressure from slowing profit growth and a gloomy market outlook, which can influence credit demand in the near term and further reduce output," said Xu Hongcai, a senior economist with the China Center for International Economic Exchanges, a government think tank.

A report issued on Tuesday by Fitch Ratings Inc says broad credit growth in the world's second-largest economy may continue to decelerate, adding to pressures on the economy.

"Broad credit growth began to moderate in the second half of 2011, and this slowdown has accelerated in 2012," said Charlene Chu, head of Chinese banks' ratings at Fitch.

"Weakening demand for credit as well as resource constraints from thinning bank liquidity has been weighing on bank lending."

Annual growth in broad money supply, which is know as M2, is likely to decrease to 12 percent in May, lower than the government's target of 14 percent, indicating that lower market liquidity may pull the economy deeper into the doldrums, said Xu.

"Now it is the best time to accelerate interest rate liberalization, cutting the loan rate while keeping the deposit rate at the current level, which means that commercial bank interest margin should be narrowed," according to Xu.

Earlier this year, Premier Wen Jiabao vowed to rein in banks' profits and break the major lenders' domination of the market by promoting financial reform.

Xu predicted that last month's consumer price index, a main gauge of inflation, may show a reading of 3.1 percent, declining from the April's 3.3 percent and March's 3.6 percent, because of easing food prices.

"By the end of June, the central bank may cut benchmark interest rates by 0.25 percentage points as well as cut the RRR by 0.5 percentage points," said Liu Ligang, head of China economics at Australia and New Zealand Banking Group Ltd.

He said that another reduction in the RRR by 100 basis points may occur in the second half as inflationary pressures may continue to ease, leaving space for further policy easing.

Besides this, boosting investment in infrastructure projects could be a very effective way to stabilize short-term economic growth, said Ba.