"The role of canceling or reducing interest tax in increasing banks' deposit is limited," said Zhao Xijun, finance professor with the Renmin University of China.

"The outflow of deposits to the stock market is due to (the fact that) investors expect a higher return from the more attractive stock market," Zhao said.

The interest tax slash won't immediately change the money outflow, and in the meantime, if China's inflation keeps at 3 percent growth within this year, the role of the slash will be limited to stop capital inflowing to the stock market, according to Lin Chaohui, an analyst at Guotai Junan Securities.

"Even if the interest tax was cancelled, when the rising inflation is taken into account, the true rate will still maintain in negative territory," Zhao said.

If the real interest rate remains negative for a long time, it will not be good for the economy, said assistant central bank governor Yi Gang during the weekend.

According to Zhao, with the improvement of China's economic structure, institutions and residents will pay more attention to investment products with higher yields, such as securities.

"Due to Chinese residents are able to bear risks and willing to invest money for higher returns, so the bull stock market is their first choice of course," said Huang Changzhong, a researcher with China Securities Research Co Ltd.

"It's difficult to stop the deposit flowing to the stock market by only canceling or halving the current interest tax," Huang added.

"Compared with the interest rate hike, the interest tax slash will have a very limited negative impact on listed companies, because they won't suffer from the unchanged interest rate as the credit costs are still unchanged," Huang said.

"But reducing or canceling the interest tax is good news for banks because their deposits could be increased," Huang said.

"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.

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.