"Liquidity is really tight today. Big banks are not willing to lend money as they face strong pressures to provide capital for companies' tax payments," said a senior dealer at a Chinese state-owned bank in Shanghai.

Enterprises usually use commercial deposits to pay taxes, which drains funds from the banking system.

Due to tightening liquidity, several traders said they expect the central bank to inject a large amount of funds into the market via open market operations on Thursday.

The central bank injected 91 billion yuan ($14.55 billion) into the market via seven- and 28-day reverse bond repurchase agreements on Tuesday, doing little to offset the 386 billion yuan due to drain from money markets this week through a combination of maturing repos, bills and reverse repos.

The central bank also conducted a net drain last week, drawing 221 billion yuan out of the interbank market.

Traders told Reuters on Tuesday that they expected the central bank to allow a net drain for the week again this week, but if rates continue to leap upward, the bank may be compelled to intervene more strongly to ensure smooth operations.

The benchmark weighted-average seven-day bond repurchase rate jumped 24.22 basis points to 3.1623 percent from 2.9201 percent at the close on Tuesday, the first time the rate has crossed the 3 percent line - which traders say marks the boundary between loose and tight market sentiment - since Oct. 15.

The 14-day repo rate gained to 3.5201 percent from 3.4083 percent, and the shortest overnight one-day repo rate rose to 2.7833 percent from 2.3585 percent.