Chinese authorities had anticipated a sell-off when on Sunday the central Bank announced it was cutting the amount of cash that lenders must keep in reserve.
The cut will "fill in the liquidity gap of banks" without easing monetary policy and putting downward pressure on China's currency, the yuan, the bank said.
A weeklong holiday for Chinese markets meant investors had an entire five days of news and data to digest in just one session, including an escalation of the trade war between China and the US. Soaring U.S. interest rates and uncertainties surrounding trade war pressurizes worldwide economies. The yuan had depreciated by 8% between March and August earlier this year, sparking fears over potential capital outflows which would place further pressure on the economy.
Friday's US non-farm payrolls showed job creation slowed in September, likely from Hurricane Florence's impact on restaurant and retail payrolls, but the Labor Department report also showed a rise in wages that could keep the Federal Reserve on track for more interest rate hikes.
On Thursday, U.S. Vice President Mike Pence highlighted disputes with China on issues such as cyber attacks, Taiwan, freedom of the seas and human rights, marking a sharpened U.S. approach toward China beyond a bitter trade war. The cut is equivalent to an injection of 750 billion yuan ($109 billion) in cash into the financial market.
China is heightening its efforts to strengthen its flagging economy by injecting it with money to combat the effects of a trade war with the US.
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"In the face of rising trade frictions, moderate yuan depreciation aids exporters and is what the market expects to see", Tang Xiangbin, currency analyst at China Minsheng Banking Corp said, predicting additional USA rate hikes would help strengthen the dollar further.
"Economic growth in China is slowing and you're starting to see the government more proactive in terms of trying to provide stimulus", she added.
Coming on the final day of the National Day holiday, the South China Morning Post says "the central bank's announcement may also serve as a shot in the arm for the China's stock market when trading resumes on Monday morning". The government is aiming to help small and mid-size businesses in particular, which have had trouble obtaining loans and face other rising pressures.
The weighted average lending rate for non-financial firms, which reflects corporate funding costs, inched up 1 basis point in the second quarter to 5.97 per cent, following a rise of 22 basis points in the first quarter and 47 basis points in 2017.
Chinese commission and state council have also substituted the term "deleveraging" with "structural deleveraging", a swap indicating less stringent on debt.
"Liquidity is flush in the banking system". "Another rate hike in December seems very likely, and we expect four more in 2019".