China's Monetary Policy Baffles Investors

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Chinese policymakers may want stability, but what they got so far, is volatility.

Since markets got back online after the week-long Lunar New Year holiday last month, the benchmark Shanghai Composite Index has fallen as much as 4 percent or gained as much as 2.25 percent in a single session.

Case in point: stocks on Monday tanked 3.7 percent as investors digested news of more property curbs from China. Beijing announced on Friday harsher-than-expected tightening measures to contain housing costs. The measures come just as the annual National People's Congress (NPC) gets under way this week.

And in recent weeks, Chinese stocks were seen tanking on news the central bank drained a record 910 billion yuan ($146 billion), which sparked fears of imminent monetary policy tightening, only to rebound a week later on talk there was still ample money in the market.

According to analysts, the market swings have been dictated by policy expectations. And that has been a confusing exercise, by all accounts.

(Read More: China Property Curbs May Knock 10% Off Prices)

"The mixed messages coming out of the PBOC are becoming borderline comical," according to Paul Krake, founder of weekly macro report View from the Peak.

On the flip-flop seen in the markets after the central bank drained funds from the market, Krake asked on CNBC Asia's "Squawk Box", "have we just seen the shortest economic cycle in history over the past three weeks?"

Other analysts are also trying to make sense of recent PBOC moves.

While Alex Wong, director of asset management at Ample Capital, notes that expectations for monetary policy tend to be bearish ahead of NPC meetings, he concedes that "the signals from the PBOC have been quite confusing." He expects investors will get more clarity over the next two weeks.

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Andrew Sullivan, Director of Asian Sales Trading at Maybank Kim Eng in Hong Kong, said he, too, is "waiting for more policy clarity from China."

But there's a shift occurring in the way China's central bank conducts monetary policy, he added, and investors shouldn't pay too much attention to the day-to-day noise. He believes policymakers are gauging sentiment through open market operations before making a more aggressive move.

"In the past, interest rates were clumsy instruments. You cut 25 basis points, and you've done it. If you warn, then you can see the reaction first."