Cash rates in China have surged to six-month highs and then eased as the central bank tries to enforce market discipline on banks to curtail unregulated lending, and there is some frustration that it seems to be introducing regular bouts of volatility.
The People's Bank of China (PBOC) wants to curb off-balance-sheet loans to sectors such as property and local governments, with authorities worried about asset-price bubbles and funds being diverted from where they are needed.
But if it sticks with using soaring rates to strong-arm banks into cutting dangerous loans, money markets could see volatility every other quarter in future, said Jim Antos, an analyst at Mizuho Securities Asia in Hong Kong.
"If this is true, it will be hugely irresponsible of the monetary authorities," he said.
(Read more: )
The central bank says there is more than enough liquidity in the system, especially after injecting 300 billion yuan ($49 billion) last week, and that major banks need to better manage their own liquidity to match asset and liability maturities.
Traders say there still isn't enough cash in the market, pointing to the 7-day cash rate rising towards 10 percent last week and again on Monday.
On Tuesday, the PBOC injected 29 billion yuan via its open market operations, and cash rates were lower.
The market's expectation is that despite its tough talk, the PBOC will prevent any bank from defaulting. For now, there appears to be less concern about the risk of a severe credit crunch or market gridlock than in June, when short-term rates rose as high as 30 percent.
"I think the PBOC understands the situation, but it is still eager to force banks to cut their leverage in face of high property prices which ignore official cooling steps," said a money-market trader at a large state-owned bank in Shanghai.
Repeating the script
Some say the PBOC seems to be repeating its script from June, and so they know how it will play out. Then, as now, traders see it as a warning to banks about the using cheap official funds to finance the vast "shadow banking" market.
The squeeze this time around is not as severe as in June, when the benchmark seven-day bond repurchase rate rose as high as 28 percent.
The seven-day rate peaked at 10.0 percent on Friday and reached a high of 9.8 percent on Monday.
There has not been any noticeable spillover into global equity markets, unlike in June.
And on Monday, the weighted-average rate for three-week cash was about 1.5 percentage points lower than the 7-day weighted-average of 8.9372 percent, suggesting the market expects the tightness to be temporary over the end of the month.
(Read more: The world's10 safest banks)
"Normally towards the end of the year, liquidity does get tighter because banks, for reporting purposes, try to gather up more deposits," said Grace Wu, head China banks analyst for Daiwa Capital Markets in Shanghai.
Much of the funding for shadow banking comes from wealth management products marketed as a higher-yielding substitute for traditional bank deposits.
They are often timed to mature near quarter-end, so the funds flow back into on-balance-sheet deposits in time for reporting requirements, and then are reopened again.
Banks often need to borrow short-term funds to finance these payouts, since the loans, bonds, and other assets underlying the products have not matured, adding to pressure on cash rates.
(Read more: Are China bank stocks cheap or just crummy?)
Regulators have moved repeatedly to curb such practices, most recently with new regulations designed to separate banks' on- and off-balance sheet businesses.
"By adopting a tighter monetary approach to the country's interbank market, China's central bank kept a tight leash on liquidity directed into the shadow banking system," Mike Werner, senior analyst at Bernstein Research, said in a report.
"Currently, shadow banking is growing at its slowest pace since late 2011 when the central bank adopted a very tight monetary policy to fight inflation."