In a delayed reaction to the largest single-day liquidity injection by the Chinese central bank, the benchmark seven-day repurchase rate fell 99.73 basis points to 3.7003 percent, reversing a rising trend that began Sept 18.

The 14-day tenor was down 55 basis points in morning trading, while the overnight rate plunged 147 basis points, the largest fall since February this year.

The drop in rates will be a relief for the central bank, struggling to ease a liquidity crunch as banks stockpile cash ahead of the public holiday in the first week of October, while at the same time setting aside money to make regulatory escrow payments due on Oct 8.

"Having put in such a huge amount of reverse repos, the central bank certainly doesn't want to see liquidity tightening in the markets, so they'll be relieved to see the rates fall," a dealer at a Chinese bank in Beijing said.

The delayed market reaction mirrors a similar pattern seen after the central bank injected 220 billion yuan on Aug 21, when rates only fell the following day.

Weak investor demand for government bonds was apparent as China's Ministry of Finance auctioned 28 billion yuan at an average yield of 4.10 percent on Wednesday morning, above the forecast of 3.98 percent.