An official with the Chinese central bank was quoted on Wednesday by Reuters as saying that liquidity in the country's financial market remained excessive, making its fight against inflation difficult.

The policymakers face challenges in particular from capital inflows and a large volume of maturing central bank bills and bond re-purchase agreements in its open market operations, the official said.

Yu Song and Helen Qiao, economists at Goldman Sachs, expect that the Chinese government will hike interest rates one more time and raise the reserve requirement ratio - a regular tool to manage inter-bank liquidity - during the first half of the year.

In the meantime, the government will allow further currency appreciation and maintain administrative controls on the property sector to curb the rising risk of asset bubbles, they wrote in a report.

"However, if the government continues with the full-scale tightening during the second half of the year as it did in the first quarter of 2011, the economy will be at increasing risk of over-tightening in our view," they added.

The Chinese stock market on Wednesday responded positively to the latest rate hike by closing above the psychologically important threshold of 3,000 points with share prices of insurance companies and banks jumping on expectations the rate hike will boost investment income and net interest margins.