The People's Bank of China looks set to risk another cash crunch at the end of this month, barely a month after the last market squeeze, as policymakers press ahead with a crackdown on shadow financing and other risky bank lending.
The central bank is attempting a delicate balancing act to keep economic growth on track while avoiding a debt-induced financial crisis.
Periodic cash squeezes as banks scramble for fresh funds highlight the policy dilemma the PBOC faces this year, as it pushes financial reforms to help rebalance the economy away from a reliance on investment and exports.
Surges in June and last month in the interest rates at which banks lend to each other signalled the central bank's determination to reduce alarming levels of debt.
"Monetary policy may be slightly tight in 2014 but the central bank has to consider the impact on the real economy," said Liang Youcai, a senior economist at the State Information Centre, a government think tank.
Analysts say the seasonal liquidity strain in money markets could re-emerge when demand for cash from firms and depositors soars before the Lunar New Year holiday at the end of this month.
The central bank mostly stood by as interbank lending rates grew more volatile last year, and was accused of worsening June's market turbulence by keeping the purse strings too tight. Since then, it has sought to improve its communication with the market, including by announcing its short-term liquidity operation, by which it injects funds into the banking system, through the Weibo microblogging platform.
But analysts do not expect a fundamental shift in the PBOC's approach - it will continue to nudge the markets into pricing short-term wholesale funding less attractively, while injecting enough cash into the banking system during periods of strain to avoid a full-blown crisis.
Sources at top government think tanks say that for 2014, the mainland will likely stick with last year's economic growth target of 7.5 per cent. Economic growth is likely to come in at 7.6 per cent for last year, the government has said, just above the official target.
In a New Year's Eve statement, the central bank pledged to maintain appropriate liquidity and achieve reasonable growth in credit and social financing, while improving credit structures.
"The traditional controls on credit are becoming less effective, while the interest rate transmission mechanism has yet to be established. This is a challenge for the PBOC," said Xu Gao, the chief economist of Everbright Securities in Beijing.
Rising money-market rates have trickled down to bond yields, but the impact on bank lending has so far been limited. The State Council has issued new guidelines to strengthen regulation of shadow bank lending that has fuelled an explosion in debt.
The PBOC hopes that higher money rates will ultimately force banks to cut risky lending, but for now demand for loans and other forms of financing from state firms and local governments that suck up the bulk of funding remains strong.
The central bank is keen to embrace market-driven interest rates to help wean the economy off its reliance on investment, but analysts say it has to consider the structural constraints and potential risks.
Analysts expect the PBOC to gradually lift the ceiling on bank deposit rates from the current 110 per cent of the benchmark rather than free up the rates in one stroke.