China money rates steady at low levels, market sees easy money ahead

By Gabriel Wildau

SHANGHAI, Feb 20 (Reuters) - China's money rates inched

higher on Wednesday but remained at low levels, as post-holiday

cash inflows and central bank foreign exchange purchases both

supported liquidity.

The benchmark weighted-average seven-day bond repurchase

rate inched up to 2.95 percent near midday, up

from 2.91 percent at Tuesday's close. Levels below three percent

typically indicate loose conditions.

The overnight repo rate remained at rock

bottom levels, trading at around 1.89 percent, barely changed

from 1.88 percent on Tuesday.

Despite a withdrawal of 860 billion yuan worth of liquidity

this week due to maturing reverse repos, traders say funding

conditions remain comfortable. The central bank drained an

additional 30 billion yuan from the market through sales of

standard repos on Tuesday.

The large volume of maturing reverse repos is the result of

the massive injection of short-term funds by the People's Bank

of China in the week just before the Lunar New Year holiday that

began on Feb 9.

That was intended to stave off the holiday liquidity crunch

that traditionally occurs as firms and households withdraw cash

to pay for holiday bonuses and consumption.

But with the customer cash now flowing back into the system,

traders say the maturing of those instruments and the modest

additional withdrawal on Tuesday are doing little to dent

liquidity. Base money creation through central bank purchases of

foreign exchange inflows is also supportive.

Interest-rate swaps indicate the market expects rates to

rise slightly but stay low.

The one-year interest-rate swap fixing was

at 3.11 percent on Wednesday, slightly up from Tuesday's 3.10

percent, but still well below its recent peak of 3.40 on Jan. 4.

Current Prev close Change

(pct) (bps)

7-day repo 2.9498 2.9148 +3.50

7-day SHIBOR 2.9490 2.9490 +0.00

Note: Repo rate is weighted average.

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MARKET DRIVERS

- Monetary policy to be neutral in 2013

- External liquidity tracker: Open market operations and

fiscal deposits are the main sources of liquidity in recent

months GRAPHIC: http://r.reuters.com/das95t

- Impact of maturing central bank bills and repos GRAPHIC: http://r.reuters.com/kas95t

- China's interest-rate swap curve has steepened GRAPHIC: http://r.reuters.com/has95t

- China's government bond yield curve has steepened GRAPHIC:

http://r.reuters.com/jas95t

- China corporate bond spreads have narrowed slightly

GRAPHIC: http://r.reuters.com/mas95t

- Hot money tracker: Hot outflows may be reducing liquidity,

but the impact is small GRAPHIC: http://r.reuters.com/was95t

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

China debt market guide:

SHIBOR rates:

Reports on central bank open market operations:

New Chinese debt issues:

Prices for central bank bills, treasury bonds and

sovereign bonds:

Overview of China financial market data:

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(Editing by Jacqueline Wong)

Keywords: MARKETS CHINA BONDS/

(Gabriel.Wildau@thomsonreuters.com)(+86 21 6104-1783)(Reuters Messaging: gabriel.wildau.thomsonreuters.com@reuters.net)

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