China is giving the domestic banking industry greater freedom by allowing banks to set their own lending rates.
Previously they were not allowed to lend at rates below a certain level set by the People's Bank of China.
The People's Bank said it hoped the move would lead to lower costs for companies.
"The People's Bank of China has decided, as of 20 July, 2013, to completely relinquish control of the lending rates of financial institutes," the bank said on its website on Friday.
As of Saturday, institutions will be allowed to "set lending rates themselves based on commercial principles".
The moves will lower financing costs for businesses and support China's long-term economic restructuring, the bank said.
The bank added it would not adjust policies on mortgages in order to promote "healthy development of the housing market".
A BBC correspondent said the announcement is seen as a significant part of the government's plan to make the economy more market-oriented.
President Xi Jinping promised to reform the country's economy to encourage more balanced growth when he came to power in March.
Chinese banks have had some freedom to lend at rates below the official level, but very few do so.
The BBC reports analysts think the move is an important step towards allowing China's currency to float freely on currency markets.
There remains an upper limit on how much interest banks are allowed to offer depositors. It currently stands at 3% with a small amount of leeway to go higher.
The People's Bank said controls on mortgage lending will also remain in place, to maintain the "healthy development of the housing market".
