Dealers said a low opening bid set the tone for the day, after some initial uncertainty about where the price would settle for the day.

"The market can accept this price, which means the market has enough money," said a dealer at a large state-owned bank in Shanghai.

The dominant role of a few large, deposit-rich state-owned banks in providing liquidity to China's interbank market gives these institutions sigificant pricing power. Smaller banks often follow their lead.

The benchmark weighted-average seven-day bond repurchase rate dived 46.98 basis points to 2.8828 percent from 3.3526 percent at the close on Monday.

Market players generally view a seven-day rate below 3 percent as signalling loose conditions.

Some dealers expected the seven-day rate could rebound slightly on Wednesday, as banks make payments to meet the reserve requirement ratio (RRR) payment.

Banks adjust their central bank reserves on the 5th, 15th, and 25th of each month in response to fluctuations in their deposit balance. If deposits rise, banks must add to their resreves, reducing liquidity.

The 14-day repo rate fell to 3.3331 percent from 3.5508 percent, and the one-day repo rate inched down to 2.2589 percent from 2.2657 percent.

Several dealers said they expected the money situation would remain loose in the near term, due to the injection from fiscal deposits and central bank purchase of foreign exchange inflows.

A Reuters analysis shows that the Ministry of Finance is likely to pump a record-high 1.6 trillion yuan ($256.90 billion)into the system in the last two months of this year through the transfer of tax revenues out of the central bank and into commercial banks.

Meanwhile, the recent rally in the yuan has prompted corporates to increase their sales of dollars to the commercial banks, which typically pass them on to the central bank. Central bank purchases of forex increase expand the base money supply, increasing liquidity.