Last week's credit squeeze in China was a stark reminder of continuing stresses in the financial sector, Xie Yu reports from Shanghai

Traders sighed with relief on Tuesday, after cash rates in China's money market eased in response to fresh liquidity from central bank open market operations.

But the volatility isn't over — indeed, it will be a regular feature in the future, experts warned.

"Seasonal factors contributed to the recent tight conditions, but they're not the fundamental problem," said Xu Gao, chief economist and head of economic research at China Everbright Securities Co Ltd.

It seems the central bank is trying to use high rates to force financial institutions to cut credit to certain sectors, including property and local governments, in the face of inflated asset prices, Xu said.

But China's capital market isn't entirely rate-sensitive, and it will experience frequent "liquidity crunches", especially at the end of months or quarters, he added.

The continuing process of interest rate liberalization is making it even harder to price capital, and that intensifies rate volatility, said Chen Li, chief China equity strategist with UBS Securities Co Ltd.

The People's Bank of China, the country's central bank, suspended open market operations in late November. That was well before money market rates surged last week.

The seven-day repurchase rate, a gauge of liquidity in the financial system, increased 100 basis points to a six-month high of 7.6 percent in Shanghai last Friday, compared with 7.22 percent during the June crunch.

On that day, the PBOC injected 300 billion yuan ($494 million) to targeted recipients, but the move didn't calm fearful investors. The seven-day repo rate finally declined on Tuesday when the central bank resumed reverse repos.

Sitting on about 20 trillion yuan of reserve deposits, which can always be released into the interbank system, the central bank is more than capable of keeping a liquidity squeeze from turning into something more severe, analysts said.

"What happened this time and back in June actually resulted from the PBOC's hands-off policy," said Xu.