China will slash reserve requirements further next year to pump liquidity into the country’s banking system, a senior economist said on Sunday.

Mr Wu Xiaoling, a former deputy governor of the People’s Bank of China, the country’s central bank, said at a forum that China will use the reserve requirement tool more frequently for macroeconomic regulation next year.

“China will cut reserve requirements to replenish liquidity if the country’s yuan funds outstanding for foreign exchanges just rise slightly or even fall in 2012,” Mr Wu said.

As of the end of November, the nation’s total yuan funds outstanding for foreign exchanges stood at 25.46 trillion yuan ($4 trillion), down 27.9 billion yuan in comparison to the end of October, central bank data showed.

Early in December, China cut the reserve requirement for commercial lenders for the first time in three years.

This reduced the reserve requirement ratio (RRR) to 21 per cent for large commercial banks and 17.5 per cent for mid- and small-sized banks.

Mr Wu said the steep downward revaluation of the Chinese yuan in recent days was the market’s normal response as the country’s economy slowed and some Western speculators pulled out funds from the country to stimulate their own economies.

“We don’t have to be worried about the currency’s depreciation,” he said, adding that China should further increase its currency’s flexibility next year while pushing forward interest rate liberalisation in order to “let market—based instruments play a bigger role in resource allocation“.

As for China’s economic growth in 2012, Mr Wu said the country will inevitably see an economic slowdown partly due to faltering external demand, as the European Union and the United States, the country’s top two trade partners, were still struggling through their sovereign debt crisis.

China’s economic growth rate slowed to 9.1 per cent during the third quarter of the year, tapering off from 9.5 per cent in the second quarter and 9.7 per cent in the first quarter.

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