Zhang Yi, chief economist at Zhonghai Shengrong Capital Management, said the cut suggested the central bank was anxious about the impact of "external shocks" to markets such as the one delivered last week by US Vice President Mike Pence's criticism of Beijing.
"Foreign investors turned bearish, unlike their previous optimistic buying of Chinese A-shares", says Mr Steven Leung, executive director at UOB Kay Hian (Hong Kong). The Philippine Stock Exchange Index fell 27.38 points, or 0.4 percent, to 7,050.82 on a value turnover of almost P4 billion.
The Shanghai Composite index was up 0.5 per cent at the midday break, after flirting with losses. The index closed 0.2 per cent higher on Tuesday. The slump followed losses of a similar magnitude by Chinese shares in Hong Kong last week.
China's stock markets tumbled on Monday, as investors were unnerved by the central bank's decision to slash the amount of cash that the country's lenders must hold as reserves, in a bid to help spur economic growth.
"The trade war's impact on the economy is showing. The economy is quite weak, and I see a growing number of companies selling their assets", said David Dai, general manager of Shanghai Wisdom Investment Co Ltd, a hedge fund.
It comes amid concerns over a potential economic drag from an escalating trade dispute with the US. And on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE Corp, slumped on a Bloomberg report that the systems of multiple USA companies had been compromised by malicious computer chips inserted by Chinese spies. This marks the biggest monthly drop since February.
The central bank said Sunday it had released 750 billion yuan ($109 billion) for additional lending by reducing bank reserve requirements by 1 per cent.
Beijing has increasingly geared its policies toward supporting exporters and persuading banks to offer more loans to small and medium-sized firms, which account for the bulk of the country's jobs, by lowering banks' RRRs. "Liquidity is not the issue".
China's attempts to increase policy support come at a time of rising external pressure due to the trade war, and as higher United States interest rates weigh on China's currency and constrain Beijing's ability to loosen policy to support growth.
Benchmark U.S. 10-year Treasury notes US10YT=RR rose late in the day, pushing yields down to 3.1931 percent. "The narrowing interest rate differentials between China and the United States will exert more downward pressure on the RMB", wrote Nathan Chow, strategist at DBS Group Research. Earlier on Monday, the PBOC set the midpoint of the yuan's daily trading band at 6.8957 per dollar, its weakest level since May 11, 2017. The rest of Asian markets fell on Monday, extending last week's sell-off.
Gold fell more than 1 percent as investors sought refuge in the dollar, which has been lifted by recent strong USA economic data that has reinforced rate hike expectations.
The yuan has been on a downward trend for months, weakening around 9% since the start of April, according to data from the central bank.