China's short-term money rates surged to the highest level in two years on Wednesday despite a generous injection of funds by the central bank to offset hefty maturing reverse repurchase agreements.

The volume-weighted average rate of the overnight repo traded in the interbank market, a measure of general liquidity, traded at 2.3589% at midday, its highest in two years and about 8 basis points higher than the previous close.

Wang Qiangsong, head of research department at Nanyin Wealth Management said the "unexpectedly tight" liquidity conditions stemmed from on-balance sheet credit lending.

The People's Bank of China (PBOC), as usual, had made higher cash injections ahead of the week-long Lunar New Year holidays to counteract higher demand from corporates and households for various payments, bonus handouts and "red packet" cash gifts during the festival.

And as those reverse repurchase agreements matured, the PBOC had to make sizable fund offerings to prevent short term money rates rising even more steeply.

On Wednesday, the PBOC injected 641 billion yuan ($94.54 billion) worth of seven-day reverse repos through open market operations, the biggest the biggest single-day injection in three years.

"Credit demand could have started to recover and would become the major driver for credit growth later," Citi analysts said in a note.

"Corporate credit, which accounted for a larger share of credit at the beginning of the year, could recover first."

Citi analysts revised forecasts for new yuan loans to 4.7 trillion yuan and incremental total social financing (TSF) to 5.8 trillion yuan for January, from an earlier prediction of 4 trillion yuan and 5.2 trillion yuan, respectively.

Investors are betting on the Chinese economy making a strong rebound after Beijing's exited its stringent zero-COVID strategy in December, and swithched to pro-growth policies.

State broadcaster CCTV reported on Tuesday that state-owned major lenders and some joint-stock banks have boosted lending last month, with their credit lending growth hitting the highest in the same period in three years.

Official January credit lending data could be released any time later this week or early next week.

($1 = 6.7804 Chinese yuan) (Reporting by Winni Zhou and Brenda Goh; Editing by Simon Cameron-Moore)