China money rates rise sharply as reserve requirements bite

* Liquidity tightens as banks pay reserve requirements

* Rates bounce as markets re-open after week-long holiday

* Rise wipes out sharp one-day fall before holiday

* Market relies on c.bank to maintain liquidity

By Gabriel Wildau

SHANGHAI, Oct 8 (Reuters) - Chinese money rates reboundedsharply on Monday as scheduled reserve requirement paymentspressured bank liquidity as the market re-opened after aweek-long break.

The benchmark weighted-average seven-day bond repurchaserate

rose 69.23 basis points to 3.8244 percent.

The rise nearly wiped out the rate's 77.10 bps fall on Sept28, the last day of trading before the week-long nationalholiday.

"The main reason for the rise is that the big banks arelooking for reserve requirements funds. There's a shortage ofevery tenor," said a trader at a city commercial bank.

The 14-day repo raterose 60.52 basis pointsto 3.9818 percent, while the overnight repo rate

rose to 3.7277 percent from 3.3812 percent.

Banks adjust their central bank reserves three times a monthin line with the rise or fall in their deposit balances to meetthe required reserve ratio (RRR).

But the first RRR adjustment following the end of the fiscalquarter often requires a particularly large net payment, sincebanks typically rush to boost deposits totals before quarter-endto dress up their quarterly reports.

The RRR payment means banks may need new cash to meetnear-term liquidity needs.

Traders said the trajectory of rates depends on the centralbank's open market operations this week.

"To gauge what's going to happen next, we need to look atthe amount the central bank puts in at Tuesday's repo auction.If they put in some money that could be enough, but if theydon't put in anything that could aggravate the situation."

The People's Bank of China (PBOC) has in recent weeks reliedon large cash injections through reverse repos, while delaying afurther cut in RRR.

The PBOC injected a net 365 billion yuan ($58.08 billion)via reverse repos the week before the holiday, the largest suchinjection ever.

Yet while volume of cash injections has been large, the PBOChas kept the interest rate on its reverse repos relatively high- around 3.35 percent for seven-day liquidity.


These rates effectively put a floor on the rate at which bankswill lend each other.

Traders that the central bank could be aiming to strike abalance between supporting economic growth by accelerating banklending and protecting loan quality by avoiding a flood ofill-considered lending that could occur if the seven-day ratefell below 3 percent.

Current Prev close Change(pct) (bps)7-day repo3.8244 3.1321 + 69.237-day SHIBOR3.8125 3.1867 + 62.58

Note: Repo rate is weighted average.


To see SHIBOR rates, please click

To see stories on China's debt issue

For prices for central bank bills, treasury bonds and

sovereign bonds, please click,

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news and analysis, please click


($1 = 6.2849 Chinese yuan)

(Additional reporting by Shanghai Newsroom; Editing by KimCoghill)


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