China money rates open sharply higher after large c.bank drain

SHANGHAI, March 27 Wed Mar 26, 2014 10:28pm EDT

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SHANGHAI, March 27 (Reuters) - China's benchmark money rate rose steeply on Thursday morning after the central bank conducted an unexectedly large cash drain during open market operations, adding pressure to cash demand as banks sequester funds for quarter-end payments.

The seven-day bond repurchase agreement opened at 4.80 percent on Thursday, up nearly a percentage point from Wednesday's close of 3.89 percent, after the People's Bank of China (PBOC) drained 98 billion yuan from the interbank market.

That quote remained the only one on the board at time of reporting, however, and traders warn that the opening transaction does not always set the tone for the day.

It was the highest opening quote since Feb. 13.

Other key rates were also up on open, but to a lesser degree, with the overnight repo at 2.64 percent from 2.51 and the 14-day repo at 5.2 percent from 4.99 percent at the end of Wednesday.

"While the central bank continues to withdraw liquidity from the market and today's repo is bigger than expected, the overall liquidity conditions before the quarter-end are quite relaxed," wrote Zhou Hao, economist at ANZ Bank in Shanghai, in a research note Wednesday morning.

"We do see many big banks offering money in the market. This could be due to central bank's large unsterilised FX purchase and de-leveraging in the off-balance-sheet activities."

Cash demand from banks and their corporate customers tends to increase toward the end of a fiscal quarter as banks sequester funds to meet regulatory requirements and corporates brush up their balance sheets for stockholder reports. (Reporting by Pete Sweeney; Editing by Kim Coghill)

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