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.
(Read more: China money rates climb further despite central bank efforts)
"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.