(Yicai) Nov. 1 -- Short-term borrowing costs for some Chinese financial institutions suddenly surged to as high as 50 percent yesterday. Market participants expect the central bank this quarter to cut the amount of cash banks must hold as reserves for the third time this year to ease the liquidity squeeze amid new bond issuance.

The overnight repurchase rate momentarily hit 50 percent for some borrowers yesterday, while the two-day and three-day interbank lending rates touched 30 percent and 20 percent, respectively. But for most of the day, rates hovered around 3 percent, according to data released on China Bond.com.cn, the bond information website run by China Central Depository & Clearing.

Some institutions that pledge bonds misjudged the situation and after realizing that capital supply was tight they sought to close their positions to avoid default, triggering the sudden surge in money market rates. The reasons behind their misstep include higher month-end demand for cash, a concentrated supply of government bonds and multiple fiscal payments.

Liquidity has been squeezed, a bond trader at an asset manager told Yicai. The party lending funds at a 50 percent interest rate is likely a trust institution, while the party borrowing the funds is likely an asset management institution, possibly with a lower credit rating, he said.

Banks are generally less willing to lend money toward the end of the month, which can very easily lead to a sudden tightening of liquidity, another bond trader said.

The People’s Bank of China will go on using various tools to maintain reasonable and ample liquidity as the impact of government bond issuance and payments is expected to continue for some time, industry insiders said, adding that the market expects the central bank to trim the reserve requirement ratio again before the end of the year.

This quarter, CNY1 trillion (USD137.2 billion) of government debt needs to be issued, resulting in an increase in liquidity demand, said Ding Shuang, chief economist at Standard Chartered Bank China and North Asia, adding that the PBOC could cut the RRR for large- and mid-sized banks by 50 basis points to unleash slightly more than CNY1 trillion of liquidity.

The PBOC lowered the RRR by 25 basis points in September, following a similar cut in March.

Editor: Emmi Laine