China money down slightly after big cash injection

* in second-largest single-day injection ever

* Traders report strongly improved liquidity

* But impact on rates is muted; overnight falls most

* No RRR cut seen before Party Congress on Nov. 8

By Gabriel Wildau

SHANGHAI, Oct 9 (Reuters) - Liquidity eased slightly in China's money markets on Tuesday following a large cash injection by the central bank, but traders remained cautious about lending at tenors longer than one day.

The central bank injected 265 billion yuan ($42.15 billion) into the country's money markets via reverse bond repurchase agreements on Tuesday morning, the second-largest gross injection on record, just shy of the 290 billion yuan injected on Sept 25.

"The central bank seems to be scrambling to bring money market rates down in order to support growth," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB.

Traders widely reported that banks were lending more freely on Tuesday than Monday, but the effect on rates was muted.

"Things started to loosen immediately today. Yesterday it was quite tight. But today, as soon as the information on the reverse repos came out, the market freed up a lot," said a trader at a large state-owned bank in Beijing.

The largest fall occurred in the overnight market, where the weighted-average repo rate

dropped 36.02 basis points to 3.3734 percent at midday.

But traders remained cautious about longer tenors. After rising sharply 79 basis points on Monday, the benchmark seven-day repo

edged down 6.82 basis points to 3.7586 percent at midday.

"The maturing volume on Thursday is pretty large so people will be cautious. The longer rates can't fall as fast as overnight," the Beijing trader added.

Maturing bills and repos are due to withdraw a net 160 billion yuan from the market this week, meaning that Tuesday's action guarantees a net injection of at least 105 billion this week.

It will mark the third straight week of net fund injections, following the record 365 billion yuan net injection in the last week before markets closed for the October holiday, when the market suffered from a severe holiday-related cash squeeze.

Interest rates sometimes fail to fully reflect the availability of funding in China's money markets. A few large state-owned banks are the main net lenders to the market. Even when these banks offer up large volumes of funds for lending, they can sometimes dictate a high price.

Tuesday's fund injection also further strengthened market expectations that the PBOC is unlikely to cut banks' required reserve ratio before the Communist Party Congress opens on Nov. 8 and will continue to rely on reverse repurchase agreements to maintain market liquidity.

Current Prev close Change (pct) (bps) 7-day repo 3.7586 3.8268 - 6.82 7-day SHIBOR 3.7508 3.8125 - 6.17

Note: Repo rate is weighted average.


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($1 = 6.2872 Chinese yuan)

(Additional reporting by Shanghai Newsroom; Editing by Eric Meijer)

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