The benchmark weighted average seven-day government bond repurchase rate tumbled 114 basis points to 7.2725 percent at midday, still a relatively elevated level although down from 8.4146 percent at Friday's close and a multi-year high of 9.0447 percent at the close on Thursday.
Traders said a level of around 3 percent for the benchmark rate would normally be considered an acceptable level for short-term funding.
The liquidity squeeze has not improved significantly as banks prepare for cash calls at the half year mark to meet regulatory requirements, including a 75 percent loan-to-deposit ratio.
"Some big banks have begun lending in relatively lower rates but overall market cash flow remains very tight," said a trader at a Chinese commercial bank in Shanghai.
The longer-term 14-day repo rate fell to 5.1698 percent from Friday's 7.4717 percent by midday, indicating the market is more optimistic about the liquidity outlook after July, traders said.
Last week, the PBOC and the Ministry of Finance auctioned 50 billion yuan in government deposits in another official step to help boost liquidity on the interbank market after the PBOC raised bank required reserve ratio, which took effect last week and sparked the squeeze.
The market was also abuzz with talk of the PBOC conducting reverse repos with a handful of individual banks to boost their cash flow, but the rumour could not be independently confirmed.
China's interest rate swaps fell on Monday morning after the PBOC refrained from making any policy announcements over the weekend. Market players have been speculating over the past few weeks the central bank could raise interest rates and that such a move was most likely to come over a weekend.
The benchmark five-year IRS dropped 3 basis pontiffs to 3.84 percent by midday while the 10-year IRS fell 16 bps to 3.89 percent.
Despite the drop, traders said worries over China's high inflation remained strong after Chinese Premier Wen Jiabao signalled that the government would struggle to meet its 4 percent inflation target this year.
Copyright Reuters, 2011