Equities sink 5.3% to fresh 2013 low

"While we acknowledge this 'fine-tuning' statement is less hawkish than the overall message from the (first-quarter monetary policy committee) meeting, we are not convinced that the policy stance has shifted from tightening to loosening," Zhang Zhiwei, an economist with Nomura Securities Co Ltd, wrote in a note on Monday.

Further, added Zhang, the central bank's statement also said the monetary policy committee had agreed to "contain financial risks with more solid actions", which "suggests to us that the policy objectives have not changed. The financial risks in the economy are not yet fully under control. Policy tightening only started in mid-March, and a shift of policy to an easing bias would exacerbate these financial risks".

Gao Shanwen, chief economist at Essence Securities Co Ltd, warned of further serious problems amid the tightening in the interbank market.

"The bill market and wealth management market, which are highly dependent on the interbank market, will be crushed, as commercial banks are struggling with liquidity," he said.

"Some local government financing vehicles are using very high-leverage, short-term financing to support long-term assets with no cash flows. They cannot cope with sharp volatility in their short-term financing costs," he added.

There are almost universal expectations of a prolonged crunch in the Chinese financial markets, a situation that is largely interpreted as the new leadership's determination to kill arbitrage, speculation and underground lending. These activities are based on loose liquidity, but they increase leverage and financial risk without supporting the real economy.

In the near term, however, the expiration of 400 billion yuan in central bank notes, as well as small growth in foreign-exchange funding positions, will provide liquidity relief in the system. That said, banks will be more scrupulous in managing their liquidity, and as such, cash shortages will likely ease but not vanish, according to Hong Hao, managing director and chief strategist at BOCOM International Holdings Co Ltd.

Cai Xiao in Beijing contributed to this story.