China money rates mixed ahead of peak demand for funds

* 7-day repo rate rises 21 bps as banks hold on to cash
* Liquidity relatively good now but increased demand seen
* PBOC may inject money via reverse repos late this week

By Lu Jianxin and Jacqueline Wong
SHANGHAI, Jan 9 (Reuters) - China's short-term lending
rates were mixed on Monday as banks kept cash in hand to meet
peak demand next week before the Lunar New Year, the country's
most important festival, traders said.
But liquidity conditions were not that tight on Monday,
although cash calls typically reach their peak in the last week
ahead of the new year, which begins on Jan. 23. this year.
Financial markets will be closed for a week.
Funds are usually tight at this time as firms pay staff
annual bonuses and shoppers withdraw money for the celebrations.
The People's Bank of China is widely expected to come to the
market's rescue by injecting money via reverse bond repurchase
agreements late this week or early next week, traders said.
There is also a possibility that the PBOC could cut banks'
reserve requirement ratios (RRR). Traders said that if it going
to occur ahead of the holiday, the cut must be announced this
week as it takes about a week to take effect.
"The market is not short of money for now, but expectations
that cash demand will peak next week has made most banks
reluctant to lend aggressively," said a trader at a major
Chinese state-owned bank in Beijing.
"The market also widely expects the PBOC to act to help ease
the liquidity squeeze, although the central bank often surprises
investors as it has its own judgement of the situation."
The benchmark weighted-average seven-day bond repurchase
rate rose 21 basis points to 4.5183 percent by
midday from 4.3063 percent at Friday's close.
Trading volume in the contract dropped to 55 billion yuan
($8.7 billion) on Monday morning from 63 billion yuan on Friday,
reflecting that cash demand remained limited for now, traders
said.

PBOC BILL SALES SUSPENDED
The shortest overnight repo rate only inched
up to 4.0060 percent from 4.0043 percent, while the 14-day repo
rate fell to 4.5424 percent from 4.6548 percent.
The PBOC announced on Friday afternoon that it would suspend
bill sales until after the end of the Lunar New Year and would
conduct reverse repo business if necessary to help inject cash
into the money market.
That ensures that the PBOC will inject 73 billion yuan into
the financial system via its maturing bills and repos this week
even if does not take other steps to boost market liquidity.
Before the announcement, the PBOC already suspended its open
market operations last week, injecting a net 51 billion yuan
into the system.
"Friday's announcement has effectively curbed speculation
on how much money market rates could rise ahead of the holiday,"
said a dealer at an Asian bank in Shanghai.
"If liquidity conditions do not deteriorate too much, the
PBOC could even end up with an RRR cut after the holiday."
In the longer term, money market cash flows are seen
improving, traders said. The government is widely expected to
relax its tight money policy this year as China's economic
growth slows in line with global weakness, caused mainly by the
euro zone debt crisis.
Reflecting temporary liquidity tightness, China's interest
rate swaps rose on Monday, with the benchmark five-year IRS
rising 7 basis points to 2.93 percent.
Still, few market players expect the PBOC to cut official
benchmark interest rates in January, citing still high
inflation, traders said.
Current Prev close
Change
(pct) (bps)
7-day repo 4.5183 4.3063 + 21.20
7-day SHIBOR 4.5083 4.3008 + 20.75
Note: Repo rate is weighted average.

($1 = 6.32 yuan)