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China money rates jump, bond futures at record lows as PBOC tightens

midday on Friday, the benchmark weighted-average
Friday, 15 Nov 2013 | 12:09 AM ET

* Short-term lending rates stage rare mid-month jump

* Govt bond futures hit record lows for second week

* C. bank drains net 15 bln yuan this week

* Response to capital inflows as U.S. QE persists

* Worries high inflation, property prices

SHANGHAI, Nov 15 (Reuters) - China's short-term funding rates staged a rare mid-month jump this week, while government bond futures hit record lows for the second straight week, as the central bank tightened liquidity in money markets. The People's Bank of China (PBOC) suspended cash injections via reverse bond repurchase agreements on Thursday, the second straight week in which it has declined to increase the money supply at one of its two regularly-scheduled open market operations. The lack of a fresh fund injection resulted in a net drain of 15 billion yuan ($2.5 billion) for the week, tripling the previous week's net drain, as previously-issued reverse repos matured, draining funds. seven-day repo rate had risen 145 basis points on the week to 5.4 percent. The overnight repo rate rose 73 bps on the week to 4.5 percent, while the 14-day rate was up 147 bps to 6.1 percent. Traders said the PBOC is draining funds to offset the increase in liquidity from strong capital inflows into China as the U.S. Federal Reserve continues its quantitative easing (QE) program. The PBOC is also worried about high consumer inflation at home, as well as persistent fast growth in the red-hot property market. "The central bank has sent a clear signal that it is tightening liquidity," said a trader at a Chinese commercial bank in Shanghai. "It apparently wants to turn off the tap first, testing waters for tighter steps in the future, such as a resumption of forwards repos to mop up money regularly from the markets." Despite the PBOC's liquidity tightening, market rates do not yet reflect expectations of an official interest rate hike, as traders expect the government will not want to jeopardise the country's fledging economic recovery. Two-year interest rate swaps (IRS) based on China's one-year benchmark bank deposit rate held at 2.98 percent by midday, 2 bps below the current benchmark rate of 3 percent. In the government bond futures market, the December 2013 five-year contract dropped as low as 91.29 yuan on Friday morning, its lowest level since China relaunched trading of the futures in early September following an 18-year ban. It trimmed some losses to stand at 91.41 yuan at midday, but was still down from 92.416 at the end of last week. Among other contracts, the March 2014 contract also hit a record low of 91.87 yuan on Friday morning, rebounding to 91.954 yuan at midday but down from last week's 92.892 yuan. The contracts first tumbled to all-time lows on Thursday last week.

SHORT TERM RATES:

Instrument RIC Rate* Change (weekly,

bps)**

1-day repo CN1DRP=CFXS 4.5019 +73 7-day repo CN7DRP=CFXS 5.3956 +145 14-day repo CN14DRP=CFXS 6.0952 +147 7-day SHIBOR SHICNYSWD= 5.3110 +137 *The volume-weighted average price (VWAP) at midday Friday ** Compared to the VWAP at market close the previous Friday

KEY INTEREST RATE SWAPS:

Instrument RIC Rate Spread (bps)* 2 yr IRS based on 1 year CNABAD2YF= 2.9825 -1.75

benchmark

5 yr 7-day repo swap CNYQB7R5Y= 4.74 +174 1 yr 7-day repo swap CNYQB7R1Y= 4.50 +150 *This spread can be seen as a proxy for forward-looking market

expectations of an interest rate cut or rise.

GOVERNMENT BOND FUTURES

Instrument RIC Price Change

(weekly, pct)

Dec 2013 5 yr CTFZ3 91.410 -1.09 Mar 2014 5 yr CTFH4 91.954 -1.01 Jun 2014 5 yr CTFM4 92.048 -1.45 >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

MARKET DRIVERS - CHINA MONEY-PBOC hopes to drain sloppy money without raising primary rates as growth revives - Govt bond futures market to start with a whimper, not a bang - In wake of cash crunch, PBOC commits to transparency but quietly tightens grip - CHINA MONEY-Tighter interbank regulation seen after cash squeeze - Collapse in China bond volumes exposes market's seamy side

DATA POINTS - External liquidity tracker: Rise in fiscal deposits slams liquidity in July http://link.reuters.com/pem75t - Impact of maturing central bank bills and repos GRAPHIC: http://link.reuters.com/pem75t - Chinese government bond curve steepens as growth fears ease GRAPHIC: http://link.reuters.com/jyr95t - China's interest-rate swap curve steepens as growth prospects improve GRAPHIC: http://link.reuters.com/ryr95t - China corporate bond spreads narrowed on improving growth outlook GRAPHIC: http://link.reuters.com/bas95t - Hot money tracker: Hot money outflows reached record high in July GRAPHIC: http://link.reuters.com/saz74t

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(Editing by Simon Cameron-Moore)