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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 rebounded sharply on Monday as scheduled reserve requirement payments pressured bank liquidity as the market re-opened after a week-long break.

The benchmark weighted-average seven-day bond repurchase rate

rose 69.23 basis points to 3.8244 percent.

The rise nearly wiped out the rate's 77.10 bps fall on Sept 28, the last day of trading before the week-long national holiday.

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

The 14-day repo rate rose 60.52 basis points to 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 month in line with the rise or fall in their deposit balances to meet the required reserve ratio (RRR).

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

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

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

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

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

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

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

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

Traders that the central bank could be aiming to strike a balance between supporting economic growth by accelerating bank lending and protecting loan quality by avoiding a flood of ill-considered lending that could occur if the seven-day rate fell below 3 percent.

Current Prev close Change (pct) (bps) 7-day repo 3.8244 3.1321 + 69.23 7-day SHIBOR 3.8125 3.1867 + 62.58

Note: Repo rate is weighted average.

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($1 = 6.2849 Chinese yuan)

(Additional reporting by Shanghai Newsroom; Editing by Kim Coghill)

Keywords: MARKETS CHINA BONDS/