* Trading extended for 30 minutes to let banks borrow money * Banks scale back non-essential business, such as arbitrage * Benchmark 7-day repo rate jumps to highest since Oct 2007 * Traders only expected mild PBOC cash injection in near term * But liquidity should improve in medium term (Add trading time prolonged, other details) By Lu Jianxin and Gabriel Wildau SHANGHAI, June 19 China's short-term funding costs surged on Wednesday, with the benchmark money market rate hitting a multi-year high, and authorities postponed the market's close by 30 minutes to give banks extra time to complete their borrowing. The money market squeeze that began early this month has worsened this week, forcing banks and other financial institutions to trim non-essential businesses, such as wealth management and arbitrage, traders said. That response may be welcomed by the central bank, which has adopted a hawkish stance towards market liquidity since May, partly to clamp down on an increase in risky shadow banking activities, traders said. But they brushed aside talk that the central bank may cut banks' required reserve ratio (RRR) to boost liquidity. The benchmark weighted-average seven-day bond repurchase rate jumped 144 basis points to close at 8.24 percent, its highest since October 2007. The overnight repo rate rose a whopping 202 bps to 7.69 percent, while the 14-day rate added 150 bps to 7.68 percent. Money rates have been on a steep uptrend since mid-May but the People's Bank of China (PBOC) has refused to inject cash on a large scale as it appears to want to squelch expectations that it would ease monetary policy in the wake of a slew of interest rate cuts by global central banks earlier this year. The interbank market decided to extend the trading time to 5 pm (0900 GMT) as many banks failed to obtain enough short-term money needed for business at the normal closing time of 4:30 pm, traders said. Such trading extensions have occurred several times recently amid the acute squeeze, traders said. "Everybody is disappointed at the central bank's non-action," said a dealer at an Asian bank in Shanghai. "But careful study does point to the fact the money market will not lack liquidity in the medium term." There has been widespread market talk that China's main state-owned banks have applied to and pressed the PBOC to cut RRR to help relieve the market liquidity crunch. But traders said the central bank is unlikely to cut RRR soon as its efforts to reverse market expectations for easing are just now having an impact. At best, the PBOC may conduct reverse repo business in its open market operations to inject limited amount of money into the market, they said. The market has recently been hit by heavy fund demand, including from the approach of quarter-end, when banks need more cash to meet regulatory checks and to boost reported deposit totals in their quarterly reports to shareholders. Traders expect tight liquidity to last for another few weeks but to improve significantly from mid-July, after the seasonal effects of quarter-end fade and a large volume of maturing PBOC bills and government bonds injects cash into the market. Current Prev close Change (pct) (bps) 7-day repo 8.2624 6.8207 +144.17 7-day SHIBOR 8.0750 6.7030 +137.20 Note: Repo rate is weighted average. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> MARKET DRIVERS - China c.bank tolerance for cash crunch signals economic confidence - China opens new front in war as yuan speculation distorts export data - China seeks to curb speculative flows without monetary tightening - Markets spin on liquidity switches - Non-bank financing to rise in 2013 DATA POINTS - External liquidity tracker: Collapse in FX purchases hurts liquidity in May GRAPHIC: link.reuters.com/pem75t - Impact of maturing central bank bills and repos GRAPHIC: link.reuters.com/pem75t - Chinese government bond curve flattens on liquidity squeeze, growth concerns GRAPHIC: link.reuters.com/jyr95t - China's interest-rate swap curve is inverted on severe liquidity squeeze GRAPHIC: link.reuters.com/ryr95t - China corporate bond spreads have narrowed slightly GRAPHIC: link.reuters.com/bas95t - Hot money tracker: Hot money inflows have returned in 2013, boosting liquidity GRAPHIC: link.reuters.com/saz74t ($1 = 6.1301 Chinese yuan) (Editing by Kim Coghill)
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