The decision comes as the world's second-largest economy faces multiple headwinds, including a prolonged crisis in the property sector, sluggish domestic consumption and weakening foreign demand.
People's Bank of China Governor Pan Gongsheng told a press conference that the reserve requirement ratio (RRR) will be "lowered by 0.5 percentage points on February 5", state broadcaster CCTV reported.
The move will provide "one trillion yuan ($140 billion) of liquidity to the market", it added.
China last cut its RRR in September by 0.25 percentage points to around 7.4 percent.
The move is intended to allow commercial banks to lend more to businesses, offering support for the real economy.
The latest decision is "another step in the right direction, but monetary policy by itself is not enough to boost economic momentum", Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, told AFP.
"A more proactive fiscal stance focusing on consumption is more important and effective," said Zhang.
"The allocation of fiscal resources to consumption instead of investment is critical, as China faces deflationary pressure."
News of the reduction follows Premier Li Qiang's calls for more "forceful" measures to support China's battered stocks, giving a shot in the arm to investor confidence.
Bloomberg reported authorities were looking at a raft of initiatives, and policymakers were seeking to mobilise nearly $280 billion, mainly from the offshore accounts of state-owned enterprises.
The central bank's governor also said Wednesday that more policies to offer support for the country's struggling property sector would soon be announced.
Markets appeared to react positively on Wednesday, with Hong Kong stocks surging to close more than three percent higher on the day.
Mainland stocks were also up: the Shanghai Composite Index closed 1.80 percent higher, while trading in Shenzhen saw a 1.25 percent rally.
China last year recorded one of its worst annual rates of growth since 1990, dampening hopes for a rapid economic recovery following the end of draconian Covid restrictions in late 2022.
The country's gross domestic product expanded 5.2 percent to hit 126 trillion yuan ($17.8 trillion) in 2023, national statistics authorities revealed last week.
The reading was an improvement on the three percent recorded in 2022, when zero-Covid weighed heavily on activity, but it also marked the weakest performance since 1990, excluding the pandemic years.
China's economy enjoyed an initial post-pandemic rebound, but ran out of steam within months as a lack of confidence among households and businesses hit consumption.
This year, China's GDP growth is expected to slow to 4.5 percent, according to World Bank forecasts.
The government is due to announce its official target in March.
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