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peoples-bank-of-chinaSHANGHAI: China's benchmark short-term money market rate spiked 103 basis points on Monday as major banks demanded high yields ahead of cash needs to meet the People's Bank of China's latest bank reserve requirement ratio (RRR) increase on Wednesday, traders said.

Lenders are preparing money for the payment after the PBOC announced the RRR hike last Thursday, which will drain about 370 billion yuan ($57 billion) from the banking system, traders said.

"It's a lenders' market today," said a trader at a Chinese commercial bank in Shanghai. "Major banks thus want higher yields than market liquidity conditions actually demand."

Traders said they believed the benchmark, the seven-day repo rate, will fall back after Thursday when the RRR hike payment is over.

The weighted average seven-day government bond repurchase rate , the main barometer of short-term liquidity  supply, jumped to 4.6381 percent at midday, up from 3.6075 percent at the close on Friday.

The rate reached its highest since late February after it also jumped 85 bps on Friday in the wake of the RRR hike announcement.

Chinese interest rate swaps were almost unchanged on Monday, consolidating after they fell late last week on expectations that the RRR hike might indicate the PBOC was not in a hurry to raise official interest rates again.

The benchmark five-year IRS was unchanged at 3.83 percent at midday, while 10-year IRS was flat at 4.13 percent. The shorter one-year IRS edged up 3 basis points but was propelled by a shortage of cash in the market, traders said.

The PBOC kicked off a new monetary tightening cycle last October, having since raised official interest rates four times and RRR eight times as it fights inflation. Annual consumer price inflation in April eased a touch to 5.3 percent from a 32-month high in March of 5.4 percent.

Copyright Reuters, 2011

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