China has used lending to spur growth in the economy in recent years
China has cut its key interest rates for the first time since 2008, in an attempt to boost its slowing growth, reports the BBC.
The benchmark one-year loan rate was cut by a quarter of one percent to 6.31% while deposit rates were cut from 3.5% to 3.25%.
The People's Bank of China also gave banks flexibility to offer higher rates to savers and lower rates to borrowers.
"It's a significant move - it's a first step in rate liberalisation," said Qinwei Wang of Capital Economics.
"The lower floor for lending rates creates more competition between banks, so banks cannot guarantee their profits as before."
In addition, China has delayed the implementation of tougher bank capital rules amid concerns that they may hurt lending.
The rules, delayed until January next year, will increase the minimum cushion of capital a bank must keep to absorb losses on their loans.
Delaying the implementation of capital rules is a way of accommodating banks' balance sheets and putting off the necessary consolidation of the banking system. There is no point in the government saying banks must lend more but also that they have to increase their capital at the same time.
There were fears that such a move may curb lending at a time when Beijing has been trying to boost growth amid a slowdown in its economy.
China had planned to introduce the rules at the start of this year.
"The Chinese are concerned about the slowdown around the world," said Sir Howard Davies, an economist who has held senior roles at the Bank of England and the Financial Services Authority.
"The US economy, although it has picked up, the growth rate has flattened off. They look at the eurozone and they are terrified about what is going on there... India has its lowest growth rate for more than five years, so everywhere they look it doesn't look very positive," Sir Howard, a regular visitor to China, told BBC News.
"So I think the Chinese are now feeling they need a bit of insurance to try to stimulate domestic demand, so that they don't slip back below the 8% [growth] figure that they attach so much importance to."
Markets have risen in recent days with investors anticipating moves by central banks and other authorities to try to stem the debt crisis and stimulate struggling economies.