The People`s Bank of China (PBOC) said it was cutting the one-year benchmark bank lending rate by 25 basis points to 4.6 percent, cutting one-year benchmark deposit rates by the same amount, and reducing reserve requirements (RRR) by 50 basis points to 18 percent for most big banks.
Major Chinese stock indexes nosedived more than 7 percent on Tuesday, hitting their lowest levels since December, following a more than 8 percent plunge on Monday.
The plunge had resumed last week despite Beijing`s efforts to arrest a 30 percent crash earlier in the summer with hundreds of billions of dollars of state-backed share purchases.
This time, the government appeared to be sitting on its hands until Tuesday`s response, which aimed more at shoring up economic fundamentals than underpinning stocks.
"Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its 7 percent growth rate fulfilled," said Liu Li-Gang, China economist at ANZ Bank in Hong Kong.
Liu said the RRR cut was the most significant element of the PBOC action, as it would inject 650 billion yuan ($101 billion), into the economy and ease concerns of a "hard landing".
China, one of the main engines of the world economy, has overtaken Greece at the top of the worry list of global investors, who fret its economy is growing at a much slower pace than the official 7 percent target for 2015.
"Currently, there is still downward pressure on China`s economic growth," the central bank said in a separate statement. "There is also relatively big volatility in global financial markets, which require more flexible usage of monetary policy tools."
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