China money rates stage correction, eyes on PBOC operations on Tuesday

* 7-day repo rate down 13 bps but still high at 4.3 pct
* Market watches whether PBOC will inject or drain money
* Liquidity set to loosen this week after reserve payments
* Cash injection expected from fiscal deposits in March

By Lu Jianxin and Gabriel Wildau
SHANGHAI, March 4 (Reuters) - China's money rates corrected
on Monday after last week's spike, but jitters over whether the
central bank would inject or drain money on Tuesday kept the
benchmark rate at an elevated level, traders said.
The weighted-average seven-day bond repurchase rate
fell to 4.30 percent near midday from 4.43 percent
at the close on Friday, which was its highest close this year.
The central bank's reluctance to inject money into the market
last week caused rates to surge.
Dealers said money rates could fall further this week as
liquidity will loosen after commercial banks make reserve
requirement payments to the central bank on Monday.
Banks are required to adjust their reserves at the central
bank on the 5th, 15th and 25th of each month on the based on the
latest changes to their deposits. If deposits increase, they
must add to reserves, while they receive refunds if deposits
fall.
Dealers said banks attracted heavy deposit inflows in
February, creating the need to increase reserves on Tuesday.
Liquidity is expected to loosen further later in March, a
month when the Ministry of Finance traditionally steps up
distribution of fiscal revenue to firms and individuals who
benefit from government programs, traders said. That revenue
swells deposits in the commercial banking system.

"Funds were abundant in the morning," said a dealer at a
Chinese state-owned bank in Shanghai. "But the market is worried
whether the PBOC will drain or inject funds tomorrow."
The central bank on Monday surveyed primary dealers about
demand for both standard repos and reverse repos in advance of
Tuesday's open market operations, leaving uncertainty about
whether it will drain or inject funds.
In its recent open market operations on Thursday, the
People's Bank of China neither drained nor injected funds into
the money market, confounding widespread expectations that it
would inject cash into the market due to a liquidity squeeze at
the end of February.
On Monday, the overnight repo rate tumbled to
3.30 percent from Friday's close of 4.1043 percent, while the
14-day repo rate dropped to 4.31 percent from
4.80 percent.

Current Prev close Change
(pct) (bps)
7-day repo 4.3003 4.4329 -13.26
7-day SHIBOR 4.3130 4.4760 -16.30
Note: Repo rate is weighted average.

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MARKET DRIVERS
- Monetary policy to be neutral in 2013
- External liquidity tracker: Open market operations and
fiscal deposits are the main sources of liquidity in recent
months GRAPHIC: r.reuters.com/das95t
- Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/kas95t
- China's interest-rate swap curve has steepened GRAPHIC: r.reuters.com/has95t
- China's government bond yield curve has steepened GRAPHIC:
r.reuters.com/jas95t
- China corporate bond spreads have narrowed slightly
GRAPHIC: r.reuters.com/mas95t
- Hot money tracker: Hot outflows may be reducing liquidity,
but the impact is small GRAPHIC: r.reuters.com/was95t

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(Editing by Kim Coghill)