In a bid to support growth, China's central bank cut its benchmark interest rates in an unexpected move reflecting mounting concerns about the health of the global economy.
Economists say Beijing wants to ensure their domestic economy, the fast growing among industrialized nations, continues to grow at a pace that will ensure social and political stability. The ongoing European sovereign debt crisis has led to diminished demand for Chinese goods.
The Federal Reserve and central banks in Europe have refrained from further monetary easing this year, but may join China in offering stimulus in the coming months.
The People's Bank of China reduced the one-year loan rate by a quarter point to 6.31 percent, effective from June 8. The one-year deposit rate was lowered to 3.25 percent from 3.50 percent. This was the first reduction since late 2008.
Further, the bank can offer loans at a 20 percent discount to the benchmark lending rate, the PBoC said.
The government on Wednesday postponed introduction of new bank capital rules to the start of next year citing that slow economic growth is giving less room for measures. Premier Wen Jiabao has pledged to continue policy fine-tuning and shift the government's focus to a more consumption-led growth.
Mark Williams chief Asia economist at Capital Economics said today's move underlines two points. First, that policymakers are going all out to shore up the economy. Second, that China increasingly resembles a normal economy.
The economist expect the benchmark lending rate to finish 2012 at 6.06 percent and the deposit rate at 3 percent, both down by a further 25 basis point down from today.
Earlier, China lowered the reserve requirement ratio by 50 basis point in May after taking similar such move in February.
The second largest economy grew at an annual rate of 8.1 percent in the first quarter of the year, the slowest pace in almost three years. The World Bank expects China's economic growth to ease to 8.2 percent in 2012 from 9.2 percent in 2011.
China's recent policy moves were mainly aimed at boosting bank lending, which could in turn help the economy to sustain growth momentum. Nonetheless, inflation fell below the government's 4 percent target in April.
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