China money rates slump as year-end cash squeeze fades

China's money rates dropped sharply on Friday, as year-end cash demand waned and the market anticipated a possible fund injection by the central bank on Saturday.

The benchmark seven-day weighted-average repo rate fell 54 basis points to 4.04 percent near midday.

The overnight rate tumbled to 2.56 percent from 3.86 percent at the close on Monday, the last trading session prior to the three-day New Year holiday.

The People's Bank of China (PBOC) surveyed banks about demand for five-day reverse bond repurchase agreements that would be auctioned on Saturday, if demand is sufficient.

The central bank normally auctions seven-day repos on Tuesdays and Thursdays. The unusual five-day tenor this weekend is designed to allow the instrument to mature next Thursday, the same day as if a seven-day reverse repo had been auctioned on Thursday this week, when the market was closed for the New Year holiday.

The PBOC sometimes chooses not to proceed with an auction even after it has surveyed demand. But traders say that while conditions have eased since Monday, several banks are still likely to report sufficient liquidity demand to PBOC for the auction on Saturday to go forward.

"There will be demand for five-day cash, but it won't be especially strong," said a trader at an Asian bank in Shanghai.

The seven-day rate hovered around 3 percent for most of last month until Dec 20, when the traditional year-end squeeze pushed the rate up, peaking at 4.58 percent on the last day of the year. A rate below 3 percent is generally seen as indicating loose conditions.

Looking forward, traders say that while rates may slide a bit further early next week, they are likely to remain elevated through the start of the Spring Festival holiday, which starts

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