Amid signs of such a squeeze, China Development Bank suspended a plan for issuing up to 15 billion yuan ($2.3 billion) in financial bills scheduled on Friday.

And in a rare case, China's railway ministry failed to fully sell 20 billion yuan in one-year bills at auction on Thursday.

Traders said such a shortage of funds would effectively bar the People's Bank of China from raising bank reserve requirement ratios (RRR) again this month.

The central bank has raised RRRs every month since last November on top of five interest rate hikes in a new cycle of monetary tightening since October partly triggered by the US Fed's second round of quantitative easing.

"Few had expected that the money market's liquidity squeeze could last such a long time this time," said a dealer at a Chinese commercial bank in Shanghai.

"Money rates opened sharply lower but soon rebounded, keeping the short-end IRS at very high levels."

The short-term one-year IRS was flat at 4.23 percent by midday, staying above 4.22 percent for the benchmark five-year IRS. In early trade, it was above the 10-year IRS as well, which, however, rebounded later.

The one-year IRS was also heading for a whopping 40 basis-point jump this week.

On the money market, the benchmark seven-day government bond repurchase repo rate fell to 5.4645 percent by midday from 5.9195 percent at Thursday's close, but still reflecting the severity of the market's current squeeze.

The main money market supply barometer was still at a level far above the around 3 percent level that traders said was acceptable for short-term funding, and that indicates normal market liquidity conditions.

One cause for the recent liquidity crunch is the Chinese companies typically settle their profits and taxes with the Ministry of Finance in July.

But it is still a sign of a drastic change in market conditions as profit and tax demand did not affect money market supply much until the government launched tightening last October to fight mounting inflation.

Copyright Reuters, 2011