“The deep correction in the bond price is attributable to the change in the cental bank’s attitude,” said Deng Haiqing, the chief economist at JZ securities. “Since September this year, the central bank’s moves have shown obvious signs of tightening, ranging from limiting big banks’ lending to raising borrowing cost through open market operations.”

Meanwhile, the Shanghai Interbank Offered Rate (Shibor), the interest rate used in lending activities between Chinese banks, saw gains across the board for the 15th consecutive day on Wednesday.

Overnight Shibor climbed 1.4 basis point to hit 2.3160 per cent, the highest level since early October, approaching the year-high of 2.3270 per cent. The rate has surged by over 6 per cent from 2.1820 per cent on November 9.

The seven-day Shibor rate was also 1.5 basis point higher to 2.4960 per cent.

“Although the central bank didn’t raise interest rates or banks’ required reserve ratio, its open market operations have been reducing liquidity from the market,” said Ming Ming, the chief fixed-income analyst at CITIC Securities in Beijing.

The People’s Bank of China (PBOC) had been withdrawing liquidity from the market for four consecutive days until Tuesday this week, before releasing a moderate amount of liquidity on Wednesday after the market went into a crisis mode on Tuesday.

On Tuesday in particular, “the PBOC was said to have required the large banks to limit their lending to small banks, which could have been the direct cause of the slump,” said Liu Hongchen, analyst at Bank of China International.

“Given the mounting depreciation pressure on the yuan and the urgency of deleveraging the economy, monetary policy has actually entered a cycle characterised by atypical tightening ,” said CITIC Securities’ Ming.

The central bank’s approach has been to increase borrowing cost in the money markets, by releasing more long-term liquidity with higher borrowing costs while tightening short-term liquidity with lower borrowing costs through open market operations as well as non-traditional tools such as MLF (Medium-term Lending Facility).

The yuan has weakened by over 4 per cent after China’s Golden Week holidays in October, depreciating by over 7 per cent in the past one year, with further weakening strongly expected.

“The risk of asset bubbles driven by excessive liquidity and high leverage, especially in the real estate sector, is also a big concern,” said Shen Jianguang, the chief economist at Mizuho Securities Asia Ltd in Hong Kong. “This may lead to more depreciation pressure on the yuan, as investors may rush to sell their assets and try to transfer capital overseas before the bubble pop, which makes it even more urgent for the central bank to move.”

“Traditional tightening such as interest rate hike is not effective any more,” said Shen.

In addition to measures mentioned by Ming, “other approach, such as the recently reported PBOC plan to include commercial banks’ off-balance-sheet wealth management products into its Macro Prudential Assessment framework, could be more effective in reducing liquidity and leverage,” said Shen.

“Many people have started talking about a passive interest rate hike given declining foreign exchange reserves, but I would say this process has already started this year,” said Qu Qing, analyst at Hua Chuang Securities.

Deng agrees with him, “to put it more directly, the PBOC has already raised interest rate in the money market to some extent”.

Looking ahead, “the overall tightening situation could last at least until the Spring Festival late January next year,” said Meng Xiangjuan, the chief fixed-income analyst at Shenwan Hongyuan Securities.