SHANGHAI China's central bank resumed injections into the money market on Thursday after a near three-week absence, in an apparent bid to ease fears of a cash crunch in the financial system following massive drains from maturing debt instruments.
The market has also been on edge after a flurry of moves by regulators to curb riskier lending activity, including a crackdown by the banking watchdog this week on misdemeanors with a focus on shadow banking.
Some investors are predicting a sell-off in low-grade corporate bonds by lenders rushing to avoid penalties, which would further strain the financial system and rattle investors.
After skipping open market operations for 13 consecutive sessions -- saying liquidity was relatively high -- the People's Bank of China (PBOC) injected 110 billion yuan ($15.98 billion) into the interbank market via reverse bond repurchase agreements on Thursday.
It added another 83.9 trillion yuan through its pledged supplementary lending facility (PSL).
"This reflects the central bank's intention to ease worries of a liquidity shortage," said Wang Jingjie, a bond analyst at GF Futures.
Wang said 217 billion yuan worth of Medium-term Lending Facility (MLF) loans matured on Thursday, draining cash from the market.
In recent months, the PBOC has shifted to a focus on liquidity management to guide short-term interest rates and squeeze financial institutions and speculators which it believes to be too highly leveraged.
Underscoring the potential liquidity swings from maturing debt instruments, China has about 4 trillion yuan worth of outstanding MLFs, which are PBOC loans with a maturity period of up to 12 months.
The PBOC last month completed its most rigorous quarterly inspection of the nation's banks to date to get a better idea of the problems it is facing.
For the first time since it was launched last year, the Macro Prudential Assessment, or MPA, included off-balance sheet wealth management products to give authorities a better sense of potential risks to the financial system.
The China Banking Regulatory Commission (CBRC) this week told lenders to conduct checks on improper trading, incentives and innovative financing methods.
Analysts say this could force banks to shrink their off-balance sheet investment activities, potentially hurting the bond market, a key destination for such investments.
"Depending on how strictly the clean-up is executed ... it is possible to see a sell-off in corporate bonds, especially those with low ratings," said Zhou Li, president at bond-focused asset manager Rationalstone Investment.
He suspected that a sudden slump on Thursday in the shares of Ping An Insurance Group Co and Industrial Bank Co Ltd could be related to checks on shadow banking, and said the same could happen in the bond market as well.
The shares' slide was believed to have been triggered by massive selling via a brokerage's asset management account.
But Zhou retains some optimism toward China's treasury bonds.
"China's economic fundamentals doesn't seem very solid. That's good news for treasuries." ($1 = 6.8818 Chinese yuan renminbi)
(Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill)