RRRs - now 14.5 percent for large institutions and 12.5 percent for smaller banks - will be lowered by a total of 100 basis points in two stages, the PBOC said.
China's central bank said on Friday it was cutting the ratio of cash that banks must hold as reserves by 100 basis points (bps), or 1 percent, as it looks to reduce the risk of a sharper slowdown in the world's second-biggest economy.
In addition, the medium-term lending facility that will mature in the first quarter of 2019 will not be continued.
The cut will release a net 800 billion yuan (US$116 billion) of liquidity, the PBOC said in a separate statement.
The latest easing sign came on Wednesday evening, when the PBoC adjusted a rule to boost the impact of previous RRR cuts.
PBOC's targeted liquidity support to certain institutions for special goal use - such as providing long-term cheap funds to the China Development Bank to finance subsidised housing - has edged towards bankrolling projects favoured by the government.
The offshore yuan pared gains slightly to trade 0.1 per cent higher at 6.8763 per dollar as of 6:30 p.m. local time.
"It is hard to clearly understand the overall policy effect as every institution has to make their own calculations", said Ding Shuang, chief Greater China economist at Standard Chartered Bank.
"We will maintain reasonable and sufficient liquidity, maintain reasonable growth in the scale of money and credit and social financing, stabilize macro-leverage, and seek internal and external balances", it said.
Fears about China's economic health have already rattled financial markets.
China slashed reserve requirements four times last year to free up more funds for banks to lend and analysts expect three to four more cuts this year. The lenders will qualify for a lower RRR if their lending to these companies reaches a certain amount, which could release about CNY 500-700 billion of additional liquidity according to Scotiabank's estimate.
China reported on Monday that factory activity shrank in December for the first time in over two years.
"The move will offset liquidity fluctuations caused by cash injections before the Spring Festival this year, and will help financial institutions continue to strengthen support for small and micro businesses as well as private businesses", the central bank said.
Analysts at JPMorgan Chase said that the central bank's action suggests that "the Chinese government is tilting toward a growth-oriented stance". "This is a classic case of banking disintermediation amid the down cycle".