China's short-term money market rates extended their fall from six-month peaks on Wednesday as corporate tax refunds deposited to commercial banks helped ease liquidity conditions, traders said.
The Ministry of Finance typically hands back large portions of tax refunds to companies around the end of the year. Those payments are transferred to commercial banks in the name of fiscal deposits.
"It appears cash flow improved today as fiscal deposits enabled the market to sustain relatively low lending rates," said a trader at a major Chinese state-owned bank in Shanghai.
(Read more: China cash rates jump on liquidity worries)
The ministry has been injecting more than 1 trillion yuan ($165 billion) of liquidity into the market via the fiscal deposits in December over the past few years. Traders expect the ministry to pump in a similar amount this year.
The benchmark money market rate, the seven-day bond repurchase rate, opened at 5.71 percent and was quoted at 5.20 percent by midday, down from Tuesday's close of 6.35 percent.
On a weighted-average basis, the rate eased to 5.59 percent from Tuesday's 6.44 percent.
The weighted-average overnight repo rate also fell to 4.05 percent from 4.21 percent, while that of the 14-day repo rate fell to 5.97 percent from 6.35 percent.
(Read more: Don't sweat the spike in China interbank rates)
Interest rates in China's interbank market have spiked to their highest level since June in recent days, due in part to seasonal factors that increase banks' demand for cash near the end of each quarter.
The People's Bank of China (PBOC) has been reluctant to lend major help because the central bank has favoured a tight liquidity stance this year to help the government curb red-hot property prices and high inflation.
But the PBOC has also signalled that it does not want rates to race out of control, as was the case in June. It injected 29 billion yuan in short-term cash into the banking system through seven-day reverse repos on Tuesday, its first such injections since Dec. 3.
"The PBOC is expected to continue its tight-liquidity policy in coming months, but it is also expected to not let market conditions worsen too much so as to hit normal operations of the financial system and the economy," said a trader at a Chinese commercial bank in Shanghai.
Traders expect the seven-day repo rate to move mainly in a relatively elevated 5-6 percent range until the Chinese Lunar New Year holidays start at the end of January. Cash demand typically rises in the run-up to the week-long holiday.