Lawmakers on Friday passed two fiscal policies aimed at mopping up excessive liquidity in the Chinese economy.

The Standing Committee of the National People's Congress authorized the government to reduce or suspend tax on interest income. They also approved the Ministry of Finance to issue 1.55 trillion yuan in special bonds to purchase foreign exchange from the central bank to finance a new State investment agency.

Analysts said the effectiveness of these measures in mopping up excessive liquidity will depend on further government moves.

Some analysts said the government might consider part or all of the bond issue being "privately" placed with the central bank, so that effectively the Ministry of Finance would be borrowing directly from it.

"In that situation, the whole operation becomes an exercise in accounting, essentially shifting a portion of foreign exchange reserves from the central bank's balance sheet to the State investment company's. There would be little impact on domestic liquidity," Morgan Stanley said in a report.

There has been widespread concern that if this one-off issue of bonds has to be absorbed by the market in one go, the drain on liquidity will drive up interest rates significantly. "The upcoming bond issues will likely be done in batches to lessen the upward pressure on interest rates," the Morgan Stanley report said.

Analysts said on Friday that cutting the tax on interest income would draw money back to banks and slow investors from pumping their funds into an overheated stock market that has almost doubled this year.

"The cut or suspension of the 20 percent tax on interest income will be a useful tool to address the issue of negative interest rates," said Jun Ma, chief economist of Deutsche Bank Greater China.

The suspension of the tax is equivalent to an increase in the after-tax one-year deposit rate of about 60 basis points and a 50 percent reduction in the interest tax would increase after-tax interest by about 30 basis points, according to Ma.

Ma said the government may prefer to initially cut the interest tax from the current 20 percent to 10 percent.

But it may hit investor confidence, analysts said. China's stock market on Friday dropped 2.39 percent to close at 3,820 points.