* Short rates drop on delayed impact of reverse repos
* Traders see reduced demand for short-term borrowing
* Short rates now have little room to fall further
* Longer rates less affected as uncertainty remains
By Gabriel Wildau
SHANGHAI, Oct 10 (Reuters) - China's key money rateplummeted on Wednesday as the cash from Tuesday's central bankfund injection hit the market and traders reported anaemicdemand for liquidity.
The benchmark weighted-average seven-day bond repurchaserate
tumbled 60 basis points to 3.1611 percentnear midday, erasing most of its rise over the last two days.
"Demand was pretty heavy yesterday, so the rate couldn'tfall that much, but today no one is borrowing," said a trader ata joint-stock bank in Beijing.
The overnight rate also slid steeply, shedding 70.88 bps anddropping below the psychologically important 3.0 percent mark to2.6583 percent near midday.
The People's Bank of China injected 265 billion yuan ($42.2billion) into the interbank market via reverse repos on Tuesday,its second-largest one-day injection ever. The overnight rateresponded quickly, but the benchmark seven-day rate fell onlyslightly on Monday.
That left some analysts wondering if the PBOC's continuedreliance on reverse repos - rather than a cut in banks' requiredreserve ratio (RRR) - to manage liquidity was losing itseffectiveness.
But similar delayed responses have occurred frequently inrecent weeks. Rates fell only slightly after huge fundinjections via reverse repos on September 25 and 27. Rates fellsubstantially only on the days following the injections.
"Yesterday morning the market opened high, and transactionswere very brisk, so the market basically followed that trend.But rates actually started to fall in the afternoon," said atrader at a city commercial bank in east China.
Following Tuesday's fall, the seven-day repo rate is nowbelow the 3.35 percent yield on the central bank's seven-dayreverse repos
Previously, traders had said that the central bank's reverserepo yield - which represents the rate at which commercial banksborrow from the central bank - effectively placed a floor underthe rate at which commercial banks will lend to each other.
However, traders now say that if liquidity from othersources is ample, while demand for loans is weak, the marketrate can fall below the reverse repo rate.
The one-month repo rate, at 3.7965 percent ,remains above the one-month reverse repo yield
3.60 percent. That suggests that banks remain relativelycautious about lending at longer tenors due to uncertainty aboutliquidity conditions in the coming weeks.
Indeed, traders say that after Tuesday's drops, theovernight and seven-day rates have little room to fall further.
Current Prev close Change(pct) (bps)7-day repo3.1611 3.7611 -60.007-day SHIBOR3.1600 3.7508 -59.08
Note: Repo rate is weighted average.
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($1 = 6.2872 Chinese yuan)($1 = 6.2878 Chinese yuan)(Editing by Kim Coghill)
Keywords: MARKETS CHINA BONDS/