Chinese workers install a signboard of Bank of China next to a branch of Sealand Securities in Hechi city, south China's Guangxi Zhuang Autonomous Region. Photo: AFP

China’s stumbling bond market experienced a dramatic rebound this week as the central bank reportedly directed banks to make loans through an interbank system called “X-Repo” that was introduced last year but had remained largely untapped.

Market yields fell while bond prices gained during the Tuesday afternoon trading session, snapping the market out of one of the worst declines in recent years that began two months ago. Futures on Chinese government bonds also rose.

The little-used X-Repo, which officially came online in August of 2015, is a rather effective cure for the suffocating tightness in the interbank borrowing and lending market.

Participating financial institutions on the interbank trading system can post unnamed bids and offers on repos and reverse repos, through with the platform’s algorithms will automatically line up the best-matched deals.

The anonymous-based repo system promises to enhance efficiency and speed up the allocation of liquidity in the interbank market.

Earlier, the country’s debt market had grown weary of counter-party risks following the Sealand Securities bond scandal involving over 20 brokerages, which exposed the murkiness of bond underwriting and relationship-based trading arrangements in China and ultimately came down to two rogue employees who had forged company seals.

Sealand Securities allegedly defaulted on a bond transaction with Bank of Langfang in North China’s Hebei Province after the recent collapse in bond prices had spoiled their financing deal akin to a repurchase agreement, only that it was backed by verbal promises rather than a formal agreement.

Now, with tensions in China’s money market apparently easing, equities investors took the cue and bought back stocks, pushing the Shanghai Composite Index higher by nearly a full percentage point in the morning session on Wednesday after losing around 2% in the past week.

While the amount of cash infusion provided through X-Repo was reportedly very limited, markets interpreted the gesture from the People’s Bank of China as a move to snap the bond markets out of the sharp declines that started in late October and have seen various bond deals postponed or forced to downsize their issuance.

The regulator had been trying to suppress growing risks in the domestic bond market, which was seen as overheated and displaying characteristics of a bubble by many analysts, citing high leverages in the system.