Alarmed by the slumping stock markets, the Chinese authorities cut key interest rate by 25 basis points (bps) on Tuesday, a fifth rate cut in just nine months.
After the latest cut, the one-year benchmark lending rate now stands at 4.6%. The Chinese central bank also cut the reserve requirement ratio by 0.5%, enabling the banks to hold more money to lend.
The Chinese stock markets plunged over 7% for the second consecutive day on Tuesday, after falling by 8.5% in the previous session.
"Clearly, this is targeted at the falling stock market," Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong, told Bloomberg.
"China needs extra liquidity to prevent systemic risks. But ultimately, fixing the economy is more important than fixing the stock market and advancing reforms is critical," he added.
Chinese equity markets have been witnessing high volatility for the past two months, as investors sold shares aggressively amid fading expectations over additional support measures by the government.
Besides, a recent data showed that China's manufacturing activity fell sharply to a six-year low in July despite many stimulus measures taken by the authorities to prop up the growth.
The authorities had also opted for yuan devaluation two weeks ago, in a bid to boost the slowing exports. China's exports fell 8.3% in July and a deflationary trend in producer prices persisted for a fourth straight year.
A devaluation of yuan will help China to make its exports more competitive in the overseas markets. China's central bank People's Bank of China (PBoC), defended the devaluation move saying that it was "a free-market reform".
However, analysts raised doubts that the step is aimed at keeping the yuan depreciating for long in order to revive its exports.