THE overnight interbank lending rate yesterday dropped the most in five years from a record high amid talks that the central bank has encouraged major banks to offer cash.

The overnight repurchase rate dropped 4.42 percentage points to 8.43 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. The benchmark weighted-average seven-day bond repurchase rate tumbled 3.51 percentage points to 8.12 percent.

Banks are required to buy debts from the interbank market at guided prices, and are restrained from extending loans and other payments of more than 30 million yuan (US$4.89 million), an internal bank communication posted by insiders on the Internet showed.

There have also been unverifiable media reports about the People's Bank of China injecting funds into certain banks through short-term liquidity operations.

"As there has not been any official statement from the regulators, it is impossible for outsiders to assess the validity of these reports," ANZ said in a report yesterday.

"While the seven-day repo rate opened lower at 8.41 percent, we still saw a few trades at 25 percent in the morning session."

ANZ economists said market liquidity conditions are unlikely to ease in the next two to three weeks in the absence of an urgent PBOC liquidity injection.

Shanghai stocks lost for a third day under the cash drought, sending the benchmark Shanghai Composite Index to a weekly plunge of 4.11 percent, the biggest since February. Lenders and brokerages led the decline.

Fitch Ratings yesterday said the ongoing liquidity strain could cause rising risks in banks and the economy.

Banks have more than 1.5 trillion yuan worth of wealth management products maturing in the next 10 days, and tight liquidity conditions in China's financial sector could constrain the ability of some banks to meet payment obligations, it said.

"The Chinese authorities have the ability to address the liquidity pressures, but their hands-off response to date reflects in part a new strategy to rein in the growth of shadow finance by constraining the liquidity available to fund new credit extension," Fitch said in a statement. "Such an approach increases repayment risk among banks, and raises the potential for a policy mis-step and/or unintended consequences."

Premier Li Keqiang said on Wednesday that banks should support economic transformation and upgrading in a more forceful way.