"The traditional controls on credit are becoming less effective, while the interest rate transmission mechanism has yet to be established, This is a challenge for the PBOC," said Xu Gao, chief economist at Everbright Securities in Beijing.
"If you control the price (of credit), you cannot control the volume; if you control the volume, you cannot control the price."
The central bank will likely make measured use of policy tools such as SLO, or reverse repos - in which banks temporarily swap fixed-income securities for cash - to help lenders weather sporadic cash strains this year, analysts say.
Rising money market rates have trickled down to bond yields, but the impact on bank lending has so far been limited.
(Read more: Marching higher once more: China cash rates)
China's cabinet has issued new guidelines to strengthen regulation of so-called shadow-bank lending that has fuelled an explosion in debt levels in recent years.
The PBOC hopes that higher money rates will ultimately force banks to cut their risky lending, but for now demand for loans and other forms of financing from the state firms and local governments that suck up the bulk of funding remains strong.
Shadow banking, which includes trust loans, bank acceptance bills and underground lending, has grown rapidly in China since 2010, and many bankers say it was partly to blame for the interest rate spikes in June and December.
Chinese banks have rushed to issue short-term, higher-yielding wealth management products to skirt the rigid regulatory control on credit, but still channel the funds into long-term investment projects. When redemptions on such products fall due, banks have to raise funds in the interbank market.
(Read more: Inside China's $6 trillion shadow banking system)
Calls for China to accelerate financial and fiscal reforms grew louder last week after figures showed its indebted local governments owe nearly $3 trillion in a debt build-up that some analysts called alarming.
Fiscal reform is all the more urgent as a lack of constraint on the finances of heavily indebted local governments will make interest rate reform less effective. A bigger slice of tax revenues would reduce their need to borrow heavily or to sell land to raise revenues.
The central bank is keen to embrace market-driven interest rates to help wean the economy off its reliance on investment, but analysts say it has to consider the structural constraints and potential risks.
The banking regulator - China Banking Regulatory Commission - has been more cautious over the pace of interest rate liberalization than the central bank for fear of fuelling banking risks, sources familiar with the policy debate say.
The central bank, which removed controls on bank lending rates in July, will have to tread more warily in freeing up the long-depressed deposit rates, which could rise immediately and push up borrowing costs, analysts say.
(Read more: China unveils boldest reforms in decades, shows Xi in command)
That could hurt manufacturers that are already operating on thin margins due to the yuan's steady appreciation and rising wages.
"They need to choose the right timing. I don't think they will free up bank deposit rates when they are under pressures to rise," said Lu Zhengwei, chief economist at Industrial Bank in Shanghai.
The central bank is likely to unveil a long-awaited deposit insurance system in early in 2014 to pave the way for freeing up bank deposit rates, analysts say.
The insurance scheme would protect depositors as Beijing is concerned some smaller lenders could go under as banks compete for deposits in a more open regime.
(Read more: China's economic reforms: What you need to know)
Analysts expect the central bank to gradually lift the ceiling on bank deposit rates - from the current 110 percent of the benchmark, rather than freeing up the rates in one stroke.
"Reforms are clear but will not be very quick. The whole reform process may not be completed in three years," said You Hongye, an economist at Essence Securities in Beijing.