Investor sentiment is expected to remain flat in the Shanghai stock market ahead of the New Year's Day holiday as well as uncertainties over future macroeconomic policies, according to observers.

At a financial conference last Friday, Xia Bin, a member of the People's Bank of China's monetary policy committee, believes there's still room for China to raise the reserve requirement ratio on banks. The PBOC on December 10 raised the reserve ratio for the sixth time this year to 18.5 percent and observers have been anticipating an interest rate hike as early as the end of this month.

The Shanghai Composite Index fell for the third day last Friday to close at 2,893.74 points. On a weekly basis, the index gained 1.85 percent.

"Market trading this week will be rather flat as investors are still cautious over next year's macroeconomic policies and the index is likely to hover around 2,900 points," Southwest Securities' analyst Zhang Gang said.

Qian Qimin, an analyst at Shenyin & Wanguo Sceurities, expects tight liquidity in the short term and does not see stocks performing strongly this week.

He sees the index between 2,850 and 2,950 points.

China said early this month its monetary policy will be prudent and more effective policies will be unveiled to fight inflation.