REFILE-China money rates stay low, but c.bank signals possible tightening

Mon Feb 18, 2013 2:28am EST

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(Refiles to fix date in first paragraph)
    * Repo rates flat as liquidity remains ample
    * Cash demand falls as Lunar New Year holiday ends
    * But c.bank signals liquidity withdrawal this week
    * Possibly no reverse repos for first time since June

    By Gabriel Wildau
    SHANGHAI, Feb 18 (Reuters) - China's money market rates held
steady at low levels on Monday as holiday cash demand waned, but
rates could rise this week as the central bank may decline to
inject funds for the first time in seven months.
    In the first normal trading session following the week-long
Lunar New Year holiday, the benchmark weighted-average seven-day
bond repurchase rate was at 2.92 percent at
midday, unchanged from Sunday's special session and comfortably
below the 3 percent threshold that traders regard as signifying
loose conditions. 
    The overnight repo rate remained depressed at
1.86 percent, flat from Sunday's level. 
    But the central bank on Monday declined to ask banks about
demand for reverse repos normally issued on Tuesdays.
    Reverse repos have become a key tool for injecting liquidity
into the money markets since mid-2012. If no reverse repos are
issued this week, it would be the first time since June last
year.
    Instead, the People's Bank of China (PBOC) on Monday asked
banks' only about demand for 28-day and 91-day forward repos,
which withdraw liquidity. 
    Before the holiday, the PBOC injected a record 860 billion
yuan ($138 billion) through 14-day reverse repos. With those
instruments due to mature this week and no fresh reverse repos
likely to be issued, a net withdrawal of liquidity for the week
appears nearly certain. 
    Market watchers were uncertain on Monday whether the PBOC's
move is a temporary response to unusually loose conditions at
the moment or whether it signals a more significant shift. 
    "After the holiday the central bank should remove a bit of
liquidity. But a complete halt of reverse repos is quite
strange. Right now it's hard to interpret," said an
interest-rate analyst at a southern Chinese bank.'
    The use of forward repos would be unexpected because the
PBOC could achieve a net withdrawal of liquidity simply by
issuing reverse repos in an amount less than 860 billion yuan. 
    If the PBOC proceeds with forward repos on Tuesday, that
would increase the size of the net withdrawal. But it is not
uncommon for authorities to survey demand for repos but decline
to issue them in the end.
    In the years leading up to early 2012, the central bank
frequently used forward repos - along with central bank bills -
to withdraw yuan liquidity from the market. 
    But the decline in foreign exchange inflows since late 2011
has reduced the need to sterilize those inflows through bill and
forward repo issuance. The PBOC has not issued forward repos
since June 2012 and has not issued central bank bills since
December 2011.
        
                                 Current  Prev close  Change
                                       (pct)           (bps)  
7-day repo         2.9223     2.9160    + 0.63
7-day SHIBOR           2.9286     2.9860     -5.74  
 Note: Repo rate is weighted average.
     
($1 = 6.2325 Chinese yuan)

 (Editing by Kim Coghill)
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