UPDATE 1-China money rates rise on month-end scramble despite injection, c.bank assurances
* 1-day, 7-day repo at highest level since June cash crunch
* Rates rise after finmin bill auction comes in high
* Traders expect tightness is temporary
* Rise comes despite reassurance from c.bank (Adds trader comment, background)
By Pete Sweeney
SHANGHAI, Oct 30 (Reuters) - Two of China's key short-term money rates climbed sharply on Wednesday as institutions hoarded cash, showing enduring cautious sentiment among investors despite regulators' attempts to calm the market.
The volume-weighted average price (VWAP) of the benchmark seven-day bond repurchase agreement hit 5.6768 percent on Wednesday, its highest level since June 28, a period when rates spiked during an unprecedented cash squeeze.
The VWAP of the overnight repo rose to 5.2835 percent, also its highest level since June, up from 4.5716 percent at the close on Tuesday.
The rise followed an auction of one-year bills by the Ministry of Finance Wednesday morning that yielded 4.01 percent, beating market expectations for 3.88 percent and much higher than the mid-yield for its benchmark one-year treasury bill , at 3.66 percent on Wednesday.
The rate is the highest seen for that tenor since 1998, according to official data, and traders said they saw the rate as implying strong investor preference for cash.
"The one-year yield auction result was too high," said a dealer at a Chinese bank, adding that it had knocked on sentiment in the secondary market.
Another trader at a city commercial bank in Shanghai blamed the tightness on the relatively small amounts of funds the People's Bank of China (PBOC) injected during open market operations on Tuesday.
"The amount of reverse repos (which the PBOC issued on Tuesday) was useless, fundamentally not enough," he said. He added that the China Development Bank, which often will play a lender of last resort, had refrained from doing so, adding to nervousness.
However, he and other traders said that they still expect the squeeze to be temporary. The central bank has the option of injecting fresh funds during regularly scheduled upcoming open market operations Thursday morning, and it can also conduct private transactions with individual banks if it wishes.
The PBOC held off from injecting funds for three consecutive sessions prior to Tuesday's 13 billion yuan ($2.13 billion) injection, even as demand for cash increased to make regularly scheduled tax and regulatory payments.
Some economists argued that this signalled the beginning of an adjustment by the PBOC to increase rates in order to curb inflationary pressure.
Dealers from some of China's largest financial instutions told Reuters that the PBOC had convened a closed-door meeting last week, at which an official reassured them that liquidity was ample and that it would maintain a stable policy in 2013.
However, at the same time the bank official warned against excessive borrowing that could leave institutions over exposed to rises in month-end cash demand, and Wednesday's rise suggests that some firms and banks have been caught short. ($1 = 6.0902 Chinese yuan) (Additional reporting by Chen Yixin, Wu Fang and Li Hongwei; Editing by Kim Coghill)