The move, which takes effect on December 5, is the strongest signal yet that the government wants to ease tight credit restrictions put in place to curb surging inflation and property prices.
The People's Bank of China said in a brief statement that it would reduce the ratio by 0.5 of a percentage point, effectively increasing the amount of money banks can lend.
Experts had forecast such a move in the coming months after the central bank said recently it would "fine-tune" monetary policy amid growing concerns that the weak global economy is increasing the risk of a sharp slowdown in China.
Capital Economics Chief Asia Economist Mark Williams said the move signalled a "decisive shift in policy stance" and would be followed by furthers cuts "in the next few months" to increase liquidity in the economy.
Alistair Thornton, an analyst at IHS Global Insight, said the government hoped the move would "bring life back into the economy".
"They are clearly concerned about the fast deteriorating situation in Europe, about how rapidly the property market is correcting and about the sheer amount of capital that appears to have been fleeing China," Thornton said.
Last week the central bank said it had eased lending restrictions on more than 20 small banks nationwide, in a bid to channel more funds to cash-strapped private firms and the farming sector.
This latest move applies to all banks around the country.
Preliminary data released by HSBC last week showed China's manufacturing activity slumped to its lowest level in 32 months in November, renewing fears the export-driven economy is losing steam due to the eurozone debt crisis and sluggish growth in the United States.
China's consumer inflation eased in October to 5.5 percent, the slowest pace since May, and property sales and prices have been falling nationwide as tough restrictions on purchases and lending take effect.
Economic growth also slowed to an annual 9.1 percent in the third quarter from 9.5 percent in the previous quarter.
Another concern for policymakers has been the explosion in underground lending fuelled by the credit restrictions, which has raised concerns among top leaders about a surge in bad debts and defaults in the private sector.
Independent business owners have been borrowing money at high interest rates from informal lenders after being rejected by major banks who favour other state-controlled enterprises, whose debts are implicitly guaranteed by the government.
China, anxious about rising living costs, has pulled on a variety of levers to curb price rises in the past 18 months, including restricting the amount of money banks can lend and hiking interest rates five time since October 2010.
- AFP/ir
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