It also announced targeted reserve requirement ratio (RRR) cuts of 50 basis points for some lenders.

The last time the PBOC cut both the RRR and interest rates simultaneously was in 2008, during the global financial crisis. It has now cut interest rates four times since November.

In a statement, the PBOC said both steps were aimed at lowering borrowing costs and "stabilising growth" in the world's second-largest economy.

"This is not surprising given that real activity indicators remain weak in April and May, and indicate that China's economy may have missed its 7 per cent growth in [the second quarter]," said ANZ economists Liu Li-Gang and Zhou Hao in a research note.

The move "allows the PBOC to ease policy to boost the sluggish economy while sending a policy signal that authorities do not want to see a bear equity market, either," they said.

The PBOC did not mention the sharemarket, but it is emerging as a key driver of consumer confidence in China.

Mr Zhang, of Haitong Securities, said Friday's sell-off was made worse as many investors were forced to sell stock due to margin calls from lenders.

"The risk in the stock market has increased greatly due to increased speculation and higher leverage," he said by phone.


New investors have poured into the market, opening 33 million new share-trading accounts between January and May. At the same time, margin lending has surged 123 per cent this year to a record 2.3 trillion yuan ($480 billion), according to Macquarie Research.

China's government is targeting annual economic growth of 7 per cent, a pace that would be the slowest since 1990. However, weak trade, retail sales and investment numbers have some analysts concerned that growth may be even slower.

The sharemarket had been the only bright spot in the economy as millions of new retail investors piled their money into equities, resulting in a doubling of the Shanghai Composite Index. Initially, it appeared to be a state-sanctioned rally as government-run newspapers published positive editorials about the market, but in recent weeks regulators have issued warnings about borrowing too much money to buy shares. Since June 12 the Shanghai Composite Index has slumped 19 per cent as confidence in the bull run faded. It's not only Shanghai that has been affected: after Friday, Shenzhen's benchmark index has fallen more than 20 per cent from a June 12 high, pushing it into bear-market territory.

While the PBOC's moves on Saturday may help to prevent a further slide in the sharemarket, it's unclear whether they will provide a significant boost to economic activity. Commercial banks have been reluctant to lend to companies because of high debt levels, and real interest rates are "still above double digits", according to ANZ.

The banks' economists expect the PBOC to cut the RRR by another 100 basis points this year, and said interest rates could be lowered by another quarter percentage point in the second half.