The People's Bank of China said in a statement that it would reduce the benchmark one-year lending rate by 0.27 percentage points to 5.31 per cent, while cutting the one-year deposit rate by the same margin to 2.25 per cent.

The move, aimed at implementing a 'moderately loose monetary policy,' would take effect Tuesday, according to the statement, which was posted on the bank's website.

The bank also decided to reduce the amount of money that banks must keep in reserve, cutting the required reserve ratio by half a percentage point with effect from Thursday.

This would release an additional 300 billion yuan (S$63.7 billion) of liquidity into the financial system, according to economists' calculations.

The move comes as a growing amount of data shows China's growth is being affected by the global financial crisis, especially as overseas markets for the nation's exports are drying up.

Growth of the heavily export-dependent Chinese economy eased to nine percent in the third quarter of this year, the lowest in more than five years.

The World Bank has forecast that the Chinese economy next year will grow by just 7.5 per cent, a level not seen in 19 years.

In a further indication of slowing activity, China's consumer price index, the main gauge of inflation, rose 2.4 per cent in November, the lowest in 22 months.

Signalling imminent action, central bank governor Zhou Xiaochuan was quoted in a report in state media late last week as saying consumer prices would likely continue to weaken.

In response to the bleak outlook, the government has decided to pull the fiscal lever, and recently announced an unprecedented four-trillion-yuan spending package.

'Monetary policy is now playing a supportive role to the main show in town: fiscal stimulus,' said Mr Stephen Green, an economist with Standard Chartered, in a research note.

'Monetary policy is now all about freeing up funds to be lent into government-backed investment projects, as well as driving down borrowing costs for leveraged firms,' he said.

Apart from these effects, economists warned the central bank's move would probably have less of an impact than similar rate cuts in more developed economies.

For example, small companies may not care so much about the rate level as they have a harder time than large and well-connected ones obtaining bank loans in the first place.

'Small and medium-sized companies need to raise funds. The key point for them now is to get the funds at all, not to get a lower interest rate,' said Mr Chen Xingdong, an economist with BNP Paribas in Beijing.

'It's good for them that the interest rate is reduced, but what's more important for them is how to get the money.'

Some economists also warned that China may gradually have less leeway to cut rates.

'I personally think the room for further cuts is not as big as (in some western economies) as the deposit rate is already just above two percent,' said Mr Lian Ping, an economist with Bank of Communications in Shanghai. -- AFP