SHANGHAI Mon Mar 2, 2015 4:40am EST

China's bourses and money markets reacted half-heartedly to a reduction in China's interest rate over the weekend, as analysts said more aggressive easing measures may be needed to shore up investor confidence.

Equity markets posted small gains on Monday, in sharp contrast with their reaction to the previous cut in November when major indexes soared. On the currency market, the yuan slid further against the dollar.

Economists and analysts said more rate cuts were already priced in by money and debt markets, and Saturday's move by the People's Bank of China left these markets virtually unmoved.

A research note by OCBC bank economist Xie Dongming said that the timing of the rate cut provided a positive backdrop to the upcoming meeting of China's National People's Congress, a largely rubber stamp parliament that begins meeting this week to decide on the country's formal GDP growth target.

The rate cut reflected anxiety among domestic investors about slowing economic growth.

"Frankly speaking, after two rate cuts within three months, it is very hard for PBoC to convince the market that its prudent monetary policy remains intact," he wrote.

"It seems that (the) Chinese central bank has lost patience over the disinflationary pressure."

Economists tend to agree that so far there has been little noticeable positive impact from previous easing moves.

Short-term rates in the interbank market have continued to drift upward since November 2014's surprise interest rate cut, and real lending rates have stayed high despite falling commodity and energy prices, suggesting that despite the central bank's easing bias, banks were wary of lending and companies remain wary of borrowing.

LIQUIDITY TRAP

Rising interbank rates and falling producer prices, along with the weakest money supply growth in over a decade in January all point toward a need for stronger measures to boost flagging economic growth.

Simply cutting rates may be less effective if banks see default risks rising at the same time as their margins are compressed by lower benchmark lending rates.

"The rate cut is not actually good news for the banks, as their profitability would be hurt," said Wu Kan, head of equity trading at investment firm Shanshan Finance in Shanghai.

Investment bank China International Capital Corp said in a research note that the rate cut is expected to narrow banks' net interest spreads by seven to eight basis points, docking lenders' net profit by about five percent.

A crackdown on non-bank lending in the shadow finance sector could also dampen the benefits of easier monetary policy. After recording exponential growth since 2009, growth in new off-balance sheet lending in China slowed by 40 percent last year, sharply slowing overall credit creation.

"The transmission mechanism is less developed in China than elsewhere because of the quantitative constraints," said Louis Kuijs, RBS Chief Economist Greater China. "That's why we are in a halfway house, moving from a system that is driven by quantitative instruments towards one where interest rates matter more."