China money rates fall after's record injections, yuan firms

(Adds comments, details, updates prices)

SHANGHAI, Jan 20 (Reuters) - China’s primary money rates fell on Friday, but remained at elevated levels, after the central bank pumped a record amount of liquidity into markets in an apparent attempt to avert a cash crunch ahead of the long Lunar New Year holiday.

Short-term funding costs had bolted to their highest levels in nearly 10 years on Wednesday on fears that liquidity was sharply tightening, sparking volatility in the yuan currency.

The volume-weighted average rate of the benchmark seven-day repo traded in the interbank market, considered the best indicator of general liquidity in China, eased to 2.6067 percent by midday on Friday, 2.69 basis points lower than the previous day’s closing average rate.

But it was still around 27 bps higher than the previous week’s close, suggesting conditions are still tight.

In the spot market, the yuan was trading at 6.8678 at midday, 72 pips firmer than the previous late session close and only 0.02 percent stronger than the daily fixing.

Chinese households and companies usually withdraw huge amounts of cash from banks ahead of the biggest Chinese holiday, forcing the central bank to repeatedly inject funds to support the market.

The People’s Bank of China injected a net 95 billion yuan ($13.83 billion) into money markets through open market operations on Friday, bringing total net injections this week to 1.13 trillion yuan, the biggest weekly injection on record, according to Reuters calculations.

The weekly injection was more than 10 times compared with the liquidity support a week earlier, which was 100 billion yuan.

Liquidity always tightens in China ahead of the Lunar New Year holiday, which starts on Jan.27 and ends on Feb.2 this year. But the PBOC’s injections this time dwarf the 690 billion yuan it pumped into the market during the same holiday period in 2016.

“It would be a surprise - and at odds with supply side structural reform - if most of the seasonal increase were not withdrawn in the three weeks following the weeklong holiday,” ING economist Tim Condon said in a note to clients.

Still, liquidity traders in China are worried about the possible impact of a huge amount of maturing open market operations due in early February.

The market is also puzzled that the central bank has not issued any new medium-term lending facility loans so far to offset two issues which expired this week.

The two batches of medium-term lending facility loans (MLF) totaling 216.5 billion yuan ($31.53 billion) were due to mature in the past two days, according to Reuters calculations based on data from the People’s Bank of China (PBOC).

Some traders attributed the absence of MLF rollovers to the PBOC’s huge amount of cash injections.

A key overnight rate for borrowing funds has also cooled on signs that authorities were pumping more into the system.

The onshore overnight implied deposit rate for yuan was trading at 2.904 percent, after surging as high as 22.099 percent at one point on Thursday - the highest since data became available in April 2007.

The unexpected spike in funding costs has forced some forex traders to bail out of short-yuan, long-dollar positions.

The resulting bounce in the yuan helped extend its gains so far in 2017 to 1.2 percent, though most currency strategists expect its depreciation trend to resume soon, predicting mid-single digit percentage losses for the full year.

The central bank guided the official midpoint rate at 6.8693 per dollar prior to the market open, weaker than the previous fix 6.8568.

Traders said panic buying of dollars by companies and households were not as strong as they saw at the end of December when volatility in the Chinese currency flared.

The market is also awaiting the inauguration of the U.S. President-elect Donald Trump later on Friday. In a recent newspaper interview, Trump appeared to soften his pledge to label China a currency manipulator on his first day in office.

The offshore yuan was trading 0.45 percent firmer than the onshore spot at 6.8373 per dollar.

China’s money and forex markets largely ignored data which showed the economy grew by a slightly faster than expected 6.8 percent in the fourth quarter, giving it solid momentum heading into what is expected to be a turbulent 2017.

But they also said the economic fundamentals would decide the yuan movement in the long run.

“We predict the yuan may weaken to 7.2-7.3 per dollar by the end of the first half this year, and it is likely to rebound in the second half,” said another trader at a Chinese bank in Shanghai, noting a steadier economy and a more tempered view on the dollar may allow the Chinese currency to regain some ground against the greenback.

($1 = 6.8690 Chinese yuan renminbi)

Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill