China has ample room to cut the reserve requirement ratio for banks, central bank Governor Zhou Xiaochuan has said today, adding that any decision should be based on market liquidity condition.

“In theory, there could be ample room to maneuver the RRR,” Zhou told a central bank news conference on the sidelines of the two sessions, “Now the RRR stands at more than 20 percent, but we have seen very low levels before, at 6 percent, say, in the late 1990s.”

“There were also other countries in the world once embracing even lower RRRs, so there’s ample room for China (to cut RRR).”

Despite that, Zhou said, the central bank could not hike or cut the RRR on a whim and any decisions should be made based on the “concrete liquidity condition,” which is related to funds that offset foreign exchange reserves and the balance of payment.

The balance of payment can hardly move dramatically in a short term, Zhou said, adding that Europe was currently the single biggest source of uncertainty in international markets.

China has hiked the basic RRR five times from the last quarter of 2010 to the third quarter in 2011, which, according to Zhou, highlights China’s frequent use of pricing tools in monetary policing.

The last time China cut its RRR was on 24 Feb, by 0.5 percentage points. It was the second cut from Nov. 2011, and the also the first in 2012, bringing the ratio in big financial institutions down to 20.5 percent.

Economists expect China’s monetary policy will gradually be loosened under this year’s “fine-tuning” framework.