China IRS, money rates slip as liquidity improves slightly

* Liquidity improves after PBOC money injection

* 1-year, 5-year IRS drop 5 bps

* 7-day repo falls 6 bps, but 14-day rate up 15 bps

* Market expects a July bank reserve ratio cut

By Lu Jianxin and Gabriel Wildau

SHANGHAI, June 27 (Reuters) - China's interest rate swaps
and most short-term lending rates dropped moderately on
Wednesday after the central bank injected money into the markets
a day earlier, helping relieving an acute liquidity squeeze,
traders said.

One-year IRS and five-year IRS
each fell 5 basis points to 2.60 percent and 2.80 percent,
respectively, though traders said further downside will be
limited in the near term due to still relatively tight cash
flows.

Short- and medium term IRS had recently risen sharply, with
one-year IRS jumping 31 bps from June 8 to Tuesday, amid the
liquidity squeeze driven by banks' fund demand near the end of
the quarter.

Another factor contributing to the tightness was demand for
funds by brokerages and fund managers for subscriptions to a
major initial public offering.

The People's Bank of China moved to ease the squeeze on
Tuesday, injecting 95 billion yuan ($14.9 billion) into the
money market through 14-day reverse bond repurchase agreements
(reverse repos) in its regular open market operations, among
other moves.

"Central bank actions have helped ease the market squeeze
but overall the liquidity situation remains relatively tight,"
said a trader with a Chinese commercial bank in Shanghai.

"The market widely expects the PBOC to cut bank reserve
requirement ratios, mostly likely in July, to further inject
money into the market. For now, we don't see much room for IRS
to fall further," the traded said.

China's benchmark seven-day weighted-average bond repurchase
rate was at 4.2405 percent at midday, down
slightly from 4.2983 percent at Tuesday's close.

The shortest overnight repo rate plunged to
3.5010 percent from 3.9065 percent.

However, the 14-day rate rose to 4.9153
percent from Tuesday's 4.7586 percent, reflecting market
concerns that liquidity could tighten again once the latest
reverse repos expire.

Chinese banks are required to adjust their deposit reserves
on the 5th, 15th and 25th of each month. They also need more
money to meet regulatory requirements, such as the 75 percent
loan-to-deposit ratio, at the end of each quarter.

Traders reported that bank deposits have risen sharply
recently as banks try to attract more savers to polish their
half-year financial statements. The rise increases banks'
obligation to set aside reserve payments for July 5, they said.

CITIC Heavy Industries Co, China's fourth-biggest maker of
heavy machinery, is launching a 4.13 billion yuan IPO on the
Shanghai Stock Exchange, the country's second largest of the
year. A two-day period of institutional subscriptions ends on
Wednesday, which is the only day for retail subscriptions.

Traders said the IPO could briefly lock up hundreds of
billions of yuan for subscriptions.

China's IPOs typically attract huge subscriptions as IPOs
often jump on debut, which encourages punters to speculate
heavily on newcomers. As a result, large-scale offerings
frequently cause short-term volatility in the country's money
market.

Current Prev close Change

(pct) (bps)
7-day repo 4.2405 4.2983 - 5.78
7-day SHIBOR 4.1708 4.2800 -10.92
Note: Repo rate is weighted average.

($1 = 6.365 Chinese yuan)

(Editing by Richard Borsuk)