* PBOC drains money via repos but does not sell bills
* Government not easing but fine-tunes monetary policy
* Benchmark 7-day repo rate slides 20 bps on ample cash
* Heads for 3 pct if PBOC operations stay mild
By Lu Jianxin and Jacqueline Wong
SHANGHAI, March 1 (Reuters) - China's short-term lending rates fell sharply on Thursday after the People's Bank of China drained money via bond repurchase agreements but refrained from selling bills, a sign that it will continue to be mild in its open market operations.
The PBOC signalled on Monday that it might sell three-month bills on Thursday by asking banks about the demand, but it ended up with a less aggressive operation, draining 20 billion yuan ($3.2 billion) via repos.
The central bank has suspended bill issues in its regular open market operations since late last year in a move to help the market tide over a shortfall in flows due to factors such as cash calls during the Lunar New Year in late January.
But it has been cautious to not leave the impression that it is easing monetary policy, disappointing the market by delaying a cut in banks' reserve requirement ratios and instantly draining funds via repos if money market rates fall sharply.
"Overall, the PBOC is fine-tuning its liquidity strategy but it has not loosened overall monetary policy," said a trader at a Chinese securities house in Shanghai.
"Short-term money rates should have more room to fall if the PBOC continues mild operations next week."
The benchmark weighted-average seven-day bond repurchase rate fell 20 basis points to 3.2819 percent at midday from 3.4800 percent at the close on Wednesday.
The one-week SHIBOR rate, a barometer of banks' willingness to lend, modelled after LIBOR, dropped 21 bps.
Many traders expect the seven-day repo to continue falling to about 3 percent unless the PBOC takes strong action to check an inflow from increased maturing bills and repos in March.
There will be 172 billion yuan in PBOC bills and 82 billion repos maturing in March, up sharply from a combined 12 billion yuan in February, according to Reuters calculations.
In addition, 183 billion yuan in reverse repos matured in February -- the amount of money that returned to the central bank from the market.
Consequently, there will be a difference of 437 billion yuan in automatic money supply because of maturing PBOC products. That leaves a question mark whether the central bank will step up its open market operations in coming weeks.
"Whether the PBOC will change tactics for its open market operations in March will give some hints of the government's monetary policy trend. Everybody is watching," said a trader at a Chinese commercial bank in Shanghai.
China's interest rate swaps were little changed on Thursday, with the benchmark five-year IRS edging up 2 bps while the one-year IRS inched down 1 bp.
IRS have largely moved sideways this week after having adjusted up earlier this year amid signs that the PBOC is not easing overall monetary easing. Expectations of such an easing pushed IRS sharply lower late last year.
Current Prev close Change
(pct) (bps) 7-day repo 3.2819 3.4800 - 19.81 7-day SHIBOR 3.2642 3.4717 - 20.75 Note: Repo rate is weighted average.