China's Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months owing to a cash squeeze that threatens to exacerbate a slowdown in the world's second-largest economy.

The ministry sold 9.53 billion yuan ($1.55 billion) of 273-day bills, less than the 15 billion yuan target, according to Chinabond, the nation's biggest bond-clearing house. Agricultural Development Bank of China Co. raised 11.51 billion yuan in a sale of six-month bills last week, less than its 20 billion yuan goal.

Banks are hoarding money to meet quarter-end capital requirements at the same time as capital inflows are easing amid a worsening economic outlook and speculation the Federal Reserve will rein in monetary stimulus. The seven-day repurchase rate, a gauge of interbank funding availability, has more than doubled in the past month and the Hang Seng China Enterprises Index of shares slid today for a record 12th day in Hong Kong.

“The cash crunch is curbing demand for bonds,” said Chen Ying, a fixed-income analyst at Sealand Securities Co. In Shenzhen. “The crunch may persist if the central bank doesn't come out to inject more capital into the financial system. If it lasts longer, it may affect issuance of both government and corporate bonds.”

Eoin Treacy's view Continued upward pressure on housing prices has forced to PBOC to tighten credit conditions in an effort to curtail speculative flows. However, they are trading a fine line between leaning on the housing market and inhibiting growth overall.

China's equivalent of the yield curve spread is currently trading at 34 basis points which is tight by any measure. A sustained move above 50 basis points will be required to confirm a return to an easing bias. This could be the catalyst required by stock market investors to reassert medium-term demand dominance.

The FTSE/Xinhua A600 Banks Index has returned to test the region of the 200-day MA and will need to hold above 9000 if the medium-term upside is to continue to be given the benefit of the doubt.

The Hong Kong listed H-Shares Index has fallen aggressively to test the lower side of the 20-month range. While somewhat oversold in the short term, a clear upward dynamic and sustained move above 11,000 is required to begin to indicate a return to demand dominance beyond the near-term.