The People's Bank of China was reported to have injected 400 billion yuan (HK$506 billion) into the interbank market late yesterday afternoon.
This came amid rumors that major banks were on the verge of capital default after the interbank loan rate climbed to a record high.
The injection was made when Bank of China (3988) was said to have had a capital default, according to the website of the 21st Century Business Herald.
Also, 50 billion yuan was supplied to Industrial & Commercial Bank of China (1398) through targeted liquidity operations and more banks were in talks to obtain financing, Hao Hong, chief China strategist at Bank of Communications, told Bloomberg.
ICBC and BOC said they have never had a capital default. A PBoC press official said he was unaware of the matter.
Money market rates have been soaring in the mainland amid a credit squeeze.
The one-day repurchase rate jumped by a record 527 basis points to an all- time high of 12.85 percent in Shanghai.
An intra-day gauge touched a record 30 percent. The seven-day rate climbed 270 basis points to 10.77 percent.
But instead of easing, the PBoC yesterday absorbed more liquidity, selling 2 billion yuan of three-month bills.
The central bank has refrained from offering reverse-repurchase agreements, which inject funds into the interbank market, since February.
Policymakers could be punishing some small banks, which have used low interbank rates to finance purchases of higher-yielding bonds, Bank of America Merrill economists wrote in a report. Tight interbank liquidity could last until early July, the report said.
Domestic banks need to do more to support economic reforms and to contain financial risks, the government said yesterday following a high-level meeting led by Premier Li Keqiang.
The credit crunch comes as China's manufacturing sector shrank at a faster pace this month, indicating contraction.
The preliminary reading for a Purchasing Managers Index released yesterday by HSBC and Markit Economics was 48.3.