"Interest tax slash is a kind of fiscal policy and targets only enterprises and residents connected with interest income; the policy has less impact on the market than interest rate hikes, a monetary policy targeting all residents and enterprises in money dealing," Zhao said.

In recent months, China has seen large sums of money flow from deposit accounts into stock trading accounts.

Special coverage: Markets Watch Related readings:  Interest tax may be cut or suspended soon  A duo of measures considered to stop deposit outflow  Special bond issuance targets excess liquidity  Hot money inflows to be curbed

In May, China's household deposits plunged by 278 billion yuan (US$36.2 billion), after a 167 billion yuan decline in April, as more and more people invest their money in the stock market.

Currently, the benchmark one-year deposits carry an interest rate of 3.06 percent. However, given the 20 percent interest tax, the actual yield is just 2.45 percent.

China began to tax interest earned on savings accounts on November 1, 1999. The 20-percent tax was levied on all renminbi and foreign currency savings accounts opened by individuals in banks in China.

By the end of 2006, the tax had generated 215 billion yuan.

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