By Lu Jianxin and Pete Sweeney
SHANGHAI (Reuters) - China's benchmark seven-day rate fell back to its normal range of 3-4 percent on Thursday after last month's unprecedented cash squeeze, although the overnight bond repurchase rate edged up as banks set aside reserves to meet the required reserve ratio.
The weighted-average overnight repo rate was up 3.2 basis points at 3.34 percent, while the seven-day rate slumped 28.3 bps to 3.95 percent on slower demand from smaller banks.
China's central bank allowed short-term borrowing costs to spike to close to 30 percent on June 20, sending a blunt but effective message to overstretched banks that it was determined to bring risky lending under control.
Policymakers later issued a flurry of reassurances that there is ample liquidity in the financial system, but the nasty squeeze could be just a preview of greater instability to come if China's leaders push ahead with liberalising interest rates and capital controls, some traders believe.
"The market squeeze is apparently over, but we remain cautious not to lend aggressively," said a dealer at a major Chinese state-owned bank in Shanghai.
"The main uncertainty is what the central bank is going to do next to clamp down on risky businesses, such as trust loans and wealth management."
More immediately, banks need to set aside additional funds with the central bank on Friday in order to meet the required reserve ratio (RRR).
Because June was the end of the first half, banks that hope to window-dress their books strive hard to attract new deposits, meaning most banks will have to put aside extra reserves, traders said.
(Editing by Sanjeev Miglani)
