The People’s Bank of China is cutting its one year deposit rate to 2.75% from 3.0% to try to revive the flagging economy.
The cut, which took the markets by surprise, was the first since 2012, and comes into effect on Saturday.
The one-year lending rate will also be reduced from 6% to 5.6%.
On Thursday figures showed China’s factory output contracting for the first time in six months.
Economic growth slowed to a five-year low of 7.3% last quarter.
Many economists had expected China to stimulate economic growth through fiscal spending rather than lowering rates.
To offset the effect of lower rates on savers the bank said it would give banks the flexibility to offer higher deposit rates, up to 1.2 times the benchmark level, rather than 1.1 times.