The country's central bank said it would cut the amount of cash banks must hold as reserves from February 5.
It's the first such cut for the year as policymakers try to shore up a weak economic recovery amid plunging stock markets.
The world's second-largest economy struggled to build a strong post-health crisis recovery last year.
It saw distress in the housing market, local government debt risks, and weakening global demand.
People's Bank of China Governor Pan Gongsheng said Wednesday's announced move would free 1 trillion yuan - or $139 billion - to the market.
"We will cut the reserve requirement ratio for all banks by 50 basis points on February 5 and will free up 1 trillion yuan to the market. We will also cut re-lending and re-discount interest rates by 25 basis points for the rural sector and small firms from tomorrow."
It is the biggest cut in just over two years and beyond most analysts' expectations.
The reduction follows earlier cuts of 25 basis points for all banks in March and September last year.
Hong Kong's Hang Seng Index extended gains after the cut was announced.
It ended the session up 3.6% for its biggest one-day gain in two months.
China's stock market tumbled 13% last year and extended its slide in the new year due to relentless foreign selling.
Some analysts say more stimulus will be needed this year as authorities try to fight off deflationary risks.
In December, top Chinese leaders at a key meeting pledged to take more steps to support the recovery.
But so far, policy measures have only slightly improved things, raising pressure on authorities to roll out more stimulus.
