China money rates stay low; strong yuan could aid liquidity


* China money rates flat, liquidity remains ample

* Large c.bank fund injections over last two weeks

* Stronger yuan could boost liquidity via bank FX purchases

* But maturing reverse repos, tax payments will drain funds

SHANGHAI, Oct 12 (Reuters) - China's money market rates werelittle changed on Friday, as conditions remained loose followinga large injection of funds by the central bank this week.

The benchmark weighted-average seven-day bond repurchaserate

has fallen sharply this week, reaching 3.1850percent near midday on Friday compared with Monday's closing at3.8268 percent. The overnight rate

was littlechanged at 2.4235 percent.

The seven-day rate followed a similar pattern on the lasttrading week before the week-long October holiday, peaking at4.6976 percent on Sept. 25 before tumbling to 3.0355 percent onthe last day before the holiday.

In both cases, the tumble in rates followed large cashinjections by the central bank in open market operations. ThePeople's Bank of China (PBOC) injected a net 164 billion yuan($26.13 billion) through reverse repos this week.

That amount was down from the record 365 billion yuan netinjection during the pre-holiday week, but still massivecompared with the average 37 billion yuan average weekly netinjection during 2012.

Future money market rates will largely depend on whetherthese fund injections continue. Reverse repos totaling 704billion yuan will mature over the next two weeks, drainingfunds. In addition, corporate tax payments will draw cash fromthe commercial banking system in this period.

Still, most traders believe the PBOC is committed tomaintaining market liquidity and will continue injecting funds.

Traders also point out that the recent strength of theChinese currency should also aid money market liquidity.

The yuan reached hit an all-time high on Friday, whichtraders say suggests there have been heavy capital inflows,partly due to the wave of global liquidity unleashed by theFederal Reserve's launch of QE3.

"Now the yuan is rising, and it feels like money creationvia banks' FX purchase could rebound," said a trader at an Asianbank in Shanghai.

The main source of base money creation for the Chineseeconomy over the past decade has been corporate clients sellingforex to commercial banks, who mostly sold it onto the centralbank. The central bank's yuan sales to commercial banks expandedthe base money supply.

As the yuan weakened against the dollar earlier this year,however, corporates began holding onto their dollars, ratherthan selling them, which slowed the creation of liquidity.

But with the yuan now strengthening, traders say FXpurchases have likely increased in recent weeks.

The central bank could release data on FX purchases later onFriday or this weekend, but the release could also be delayeduntil the end of October.Current Prev close Change(pct) (bps)7-day repo3.1873 3.1855 + 0.187-day SHIBOR3.1725 3.1608 + 1.17

Note: Repo rate is weighted average.


To see SHIBOR rates, please click

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For prices for central bank bills, treasury bonds and

sovereign bonds, please click,

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($1 = 6.2770 Chinese yuan)(Editing by Richard Borsuk)

((gabriel.wildau@thomsonreuters.com)(+86 21 6104-1783)(ReutersMessaging: gabriel.wildau.thomsonreuters.com@reuters.net))


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