* PBOC keeps its 7-day reverse repo rate flat at 3.4 pct * Market increasingly accepts PBOC rate as guidance * Fund demand at PBOC reverse repo rate relatively weak * PBOC holds off on longer-term 28-day reverse repos for now By Lu Jianxin and Gabriel Wildau SHANGHAI, Aug 30 (Reuters) - Short-term funding costs in China's money market rose on Thursday as the central bank signalled a floor for the benchmark seven-day rate, traders said. In open market operations on Thursday, the People's Bank of China (PBOC) left the rate for its seven-day reverse bond repurchase agreements unchanged at 3.4 percent. "Banks and other institutions are increasingly accepting PBOC guidance via its reverse repo rates as the central bank is anyway the main supplier of short-term liquidity to the market," said a trader at a major Chinese state-owned bank in Beijing. "With its seven-day reverse repo now at 3.4 percent, you need at least a rate of 3.5 percent for a seven-day re-lending. Based on this standard, money market rates rose today." The weighted average seven-day repo rate edged up 7.26 basis points to 3.5971 percent at midday, while the 14-day repo rate rose 23.37 bps to 3.5871 percent, playing catch-up with the seven-day repo rate, traders said. The PBOC injected 40 billion yuan ($6.3 billion) into the markets through seven- and 14-day reverse repos on Thursday, meaning it will drain a net 54 billion yuan from the market this week. As with its seven-day operations, the PBOC kept the rate of its 14-day reverse repos unchanged at 3.55 percent. Traders said the amount of reverse repos auctioned by the PBOC on Thursday was small due to relatively weak demand. "By indicating a floor for the main money market rate, the PBOC appears to want to dampen excessive short-term fund demand," said a trader at an Asian bank in Shanghai. "This is in line with the government's recent policy not to leave too much liquidity in the banking system by loosening monetary policy further." CAUTIOUS APPROACH The market has been expecting the PBOC to reduce banks' reserve requirement ratio (RRR) since late June but the central bank appears to be conservative after having cut RRR twice and reduced interest rates twice this year to counter a sharp slowdown of the world's second-largest economy. Authorities appear concerned that pouring money into the system may not actually help, given that the slowing economy is actually trimming firms' demand for capital, especially for medium- and long-term funds. The government appears to be also wary of a rebound in prices for consumer goods as well as property. The PBOC has relied on regularly injecting and draining cash through reverse repos since May, but traders said the short tenor of the repos, which were at first limited to seven days, had the effect of draining base money. So it began to increase its use of 14-day reverse repos in recent weeks and is now poised to add the longer 28-day reverse repo contract to the mix after it surveyed primary dealers for demand for the longer-dated reverse repo on Wednesday. Traders told Reuters that bankers had responded positively to the suggestion that the PBOC would start issuing 28-day reverse repos. But the central bank on Thursday declined to make its first-ever use of 28-day reverse repos. Still, the act of publicly surveying banks suggested that it was ready to resort to such tools and might do so in the near future, traders said. Current Prev close Change (pct) (bps) 7-day repo 3.5971 3.5245 + 7.26 7-day SHIBOR 3.5842 3.5279 + 5.63 Note: Repo rate is weighted average. ($1 = 6.35 Chinese yuan) (Editing by Jacqueline Wong) - Tweet this
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