Setting the Tone

Currently, the interbank market has become a major way for banks to make money and speculate on interbank lending rates. Therefore, the lending rate has become higher, making it harder for small and medium-sized companies to get funded, he said.

"Another reason is that banks have been committed to too many projects, some of which require continuous investment, making banks even more cash-strapped," he added.

When the liquidity shortage occurred in 2013, the market expected the central bank to turn the tap back on. However, the central bank didn't do that. Instead, it merely used some instruments to release a certain amount of liquidity.

Xie said the central bank has already realized the severe ramifications of an oversupply in money. "Unlimited money supply will result in serious consequences, including inflationary pressure, too much money to sectors with excess capacity and to local government funding platforms, banks' non-performing assets and the creation of loopholes in the banking system."

Money supply adjustments can't solve the problem. It should be solved by changes to the economic structure and optimizing lending structures, said Xie.

Forecasting 2014

The central bank vowed in the report to use better regulatory measures to strike a balance between liquidity and interest rate fluctuations.

Lu Zhengwei, chief economist with the Industrial Bank, said tight balance in the money market is a good thing and will be a continuous phenomenon in China in the coming years.

"For many years, the central bank has been thinking that liquidity in the banking system is too loose, therefore commercial banks are not so sensitive to macro-control measures from the central bank. After the credit crunch in 2013, a tight balance was formed in banks. It's a very satisfying result which the central bank won't easily let go of," he said.

"In mature markets, the central bank should be able to control the behaviors of commercial banks with even a tiny change in the interest rate. That can only be achieved when there is a constant lack of liquidity in the banking system," Lu said.

"A tight balance can make commercial banks more sensitive to central bank's monetary policy changes. But it can also be dangerous as it may cause unpredictable financial risks. Therefore, corresponding measures must be taken when implementing the tight balance policy, such as releasing interest rate goals timely and constantly improving the transparency of monetary policies," he said.

Xiang Songzuo, chief economist with the Agricultural Bank of China, said the focus of the monetary policy in 2014 would be "maintaining a stable supply of money and optimizing the structure of lending."

The total amount of currency and debt in China has skyrocketed during the past years. There is not much room for growth in the total amount of money supply, said Xiang. "The key lies in structural adjustment, particularly lending structure."

Therefore, banks should be encouraged to lend to small and micro businesses and sectors that are helpful for China's employment, technology innovation and economic rebalancing. Loans to the real estate and sectors with excess capacity should be strictly controlled, Xiang said.

Wen Bin, an analyst at Bank of China, said China's monetary policy will face greater challenges in 2014, especially from the withdrawal of the quantitative easing program in the United States.

As the U.S. Federal Reserve has started tapering its quantitative easing, China's central bank will adjust its policies to stabilize liquidity and prevent it from being adversely affected by the withdrawal of foreign capital, said Wen.