The central bank appears to be trying to force banks to curb risky lending practices in the shadow banking system amid rising concerns about excessive debt. Rapid growth in the world's second-largest economy over the last four years has also fanned fears about a property market bubble.
The key seven-day bond repurchase rate initially opened lower but then spiked to 8.9 percent on a weighted-average basis by mid-morning on Monday, up from 8.21 percent on Friday.
The central bank announced after market close on Friday that it had injected 300 billion yuan via short-term liquidity operations from December 18 to 20. The seven-day rate reached as high as 10 percent on Friday, the highest level since June.
The People's Bank of China (PBOC) also emphasised that excess cash reserves in the banking system -- a key measure of liquidity -- stood at more than 1.5 trillion yuan, a high level by historical standards. But market players took a different view.
"The PBOC appeared to stress that cash reserves are abundant in comparison to previous years, but the market has expanded sharply in recent years and demand in the interbank market has far exceeded the previous years' levels," said a money market trader at a major state-owned commercial bank in Shanghai.
A suspiciously low opening trade on Monday may also reflect the central bank's attempt to calm the market. The seven-day repo opened sharply lower at 5.57 percent. In recent days traders have expressed suspicion that such low opening quotes on benchmark rates reflect intervention by the central bank in an effort to guide trading.
The unusual timing of Monday's opening trade bolstered such suspicions. The opening trade on the seven-day repo came unusually early at 9:01 A.M. Shanghai time (0101 GMT), but the next trade, at 7.60 percent, did not occur until nearly an hour later and, according to data from the National Interbank Funding Center. Rates continued to rise further.
Traders say that a large volume of maturing debt near the year-end, which banks need to roll over, have contributed to the spike in rates. The market is interpreting the PBOC's tough stance as an unofficial shift towards tighter monetary policy.
"I think the PBOC understands the situation, but it is still eager to force banks to cut their leverage in the face of high property prices, which ignores official cooling steps," said the money market trader.
The market will be watching closely to see if the central bank injects cash at regular open market operations on Tuesday. The PBOC has skipped such operations for five straight sessions.