Moody's Investors Service said on Thursday that the latest policy action by the People's Bank of China (PBoC) will add liquidity to the financial system, but it also points to the weakness in the domestic economy.

"On balance, we expect the latest policy action to be positive for Chinese banks from a liquidity perspective," Frank Wu, a Moody's analyst, said.

"This will alleviate upward pressure on interbank borrowing rates and ease interbank rate volatility. But the latest policy move is symptomatic of further weakness in the domestic economy and the challenging operating environment for banks," he added.