UPDATE 1-China key money rate rises to 2-week high after major drain

Tue Mar 4, 2014 11:12pm EST

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SHANGHAI, March 5 (Reuters) - China's average benchmark seven-day bond repurchase rate climbed to a two-week high of 3.8104 percent on Wednesday, after the central bank assertively drained funds from money markets on Tuesday.

Regulators have signalled for a minor relaxation of a previously tight money policy that produced repeated dramatic spikes in China's money markets in June, December and January.

The original target of the rate rise was shadow banking and sloppy lending, but concerns about hot money inflows chasing high yields, combined with weakening macroeconomic data, appears to have inspired a change of heart.

The People's Bank of China (PBOC), therefore, held back from draining significant amounts of funds from money markets in February, allowing the seven-day repo rate to sink back below 4 percent and stay there.

The weighted average of the seven-day repo rate was last above 4 percent on Feb. 14.

The PBOC also made public statements reassuring investors that the current monetary policy was stable and stock investors shouldn't worry about liquidity issues -- which some traders took as a signal the bank was going to ease money conditions to help support a rally in China's equity markets, which have struggled as resuming IPOs compete with listed companies for investor cash.

However, that does not mean the PBOC is signalling for a free-for-all, traders say, and there are questions about how long the new relaxed regime will last.

"Conditions are still relatively easy. At first we were really cautious at signs of relaxation, and as rates stayed low, we slowly grew more optimistic," said a trader at a Chinese bank.

However, other traders said current conditions were likely only an Indian summer engineered for the currently running National People's Congress -- after which rates will be allowed to rise again as soon as next week.

After the weighted average rate of the seven-day repo hit a low of 2.843 percent on Monday, its lowest rate since May 2013, the bank moved to soak up cash, draining 85 billion yuan ($13.8 billion) during open market operations on Tuesday.

Traders believe the move was designed to bring rates back into a stable range above 3 percent. Other commonly traded repo tenors remained in accomodative territory.

($1 = 6.1430 Chinese yuan) (Reporting by Pete Sweeney; Editing by Jacqueline Wong)

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