Mainland short-term money rates posted alarming surges for a second day yesterday after the central bank refused to inject money into the market to alleviate the crunch, raising fears that regulators are engineering another cash squeeze similar to the one that rocked global markets in June.
Most traders suspected the People's Bank of China was sending a message targeting specific players in the murky world of shadow banking.
"This is a complete mess," said a trader at a major state-owned bank in Beijing, pointing to the PBOC's decision to hold off from injecting funds for a fifth consecutive session as the reason for the surge. "Market sentiment is not good."
As traders scrambled to cover, the PBOC decided to extend trading by 30 minutes to give more time for settlement.
The PBOC also announced on its microblog that it had injected funds into the market through short-term liquidity operations, without specifying the amount or the date - an apparent attempt to assure the market that it was making liquidity available in order to cope with end-of-year tax flows.
"If necessary, the bank will continue to provide liquidity support using [such operations] in accordance with the fiscal situation, depending on the condition of financial institutions," it said.
One-year interest rate swaps based on the benchmark seven-day repo rate, which typically reflect liquidity conditions, closed at 4.97 per cent, a record high.
The average price for the seven-day repo itself closed at 7.0852 per cent, the highest since June 26, with individual quotes going as high as 9.8 per cent, compared with an opening quote of 4.85 per cent.