By Pete Sweeney and Lu Jianxin

SHANGHAI, Feb 5 (Reuters) - China's central bank injected a

whopping 450 billion yuan ($72.20 billion) into the money

markets on Tuesday, the largest single-day injection on record,

showing Beijing's increased confidence in its ability to use

short-term precision tools to manage the money supply.

Traders told Reuters that the infusion of cash was made

during ordinary open market operations, using 14-day reverse

bond repurchase agreements, which will drain money back out of

the system in two weeks.

The People's Bank of China (PBOC) has increasingly relied on

such tools to maintain short-term liquidity and hold down

interest rates, instead of making longer term adjustments such

as cuts to bank reserve requirement ratios (RRR) that regulators

fear could provoke inflation.

Liquidity typically tightens with the approach of the

Chinese Spring Festival holiday, as individuals withdraw cash to

spend on gifts, food and travel.

Some analysts had speculated that the central bank might be

forced to cut the RRR before the holiday to prevent a squeeze,

but instead authorities leaned more heavily than ever on

short-term open market operations.

'With the Spring Festival drawing near, short-term liquidity

in the money market is relatively tight,' said a senior trader

at a Chinese state-owned bank in Beijing.

The central bank has steadily been injecting cash since last

week to stabilise short-term rates, he said, which often spike

in the runup to traditional festivals. Markets will be closed

for a week starting on Feb. 9 for the Chinese Spring Festival

holiday.

This time around it appears the PBOC has found the right

formula to keep rates relatively stable, said Frances Cheung,

strategist at Credit Agricole CIB.

'We have not seen the spikes in repo rates that we usually

did see ahead of the Chinese New Year, likely upon willingness

from the PBOC to provide liquidity,' she wrote in a research

note distributed on Tuesday morning.

The benchmark 7-day repo rate began moving

upward as the Spring Festival approached, but Tuesday's massive

injection has signalled to the market the bank's determination

to keep rates in check by lowering the price of money.

A total of 198 billion yuan in maturing instruments are set

to drain cash from the markets this week, which will be more

than offset by Tuesday's injection, and the bank has the option

to inject even more funds during upcoming open market operations

on Thursday.

'Now that the central bank has announced that it will more

frequently use open market operations to adjust liquidity, the

market widely expects that money market rates will stabilise and

will not spike too much even during holidays or at the end of

months or quarters,' said the senior trader in Beijing.

Market participants said the PBOC's recently announced

decision to allow select institutions to bid for reverse repos

on a daily basis, instead of just on Mondays and Wednesdays,

shows that it is planning to intensify the tempo and precision

with which it moves money in and out of the interbank market.

'We believe interbank rates will only climb a little bit the

rest of this week and the PBOC is unlikely to cut RRR as it

avoids sending easing signals,' wrote Ting Lu and Xiaojia Zhi,

economists at Bank of America Merrill Lynch, in a research note

this morning.

Tuesday's injection overturns the previous record of 395

billion yuan injected on Oct. 30, 2012.

($1 = 6.2328 Chinese yuan)

(Editing by Edmund Klamann)

((pete.sweeney@thomsonreuters.com)(+86 21 6104 1777 / +86 158

0188 9934)(Reuters Messaging:

pete.sweeney.thomsonreuters.com@reuters.net))

Keywords: CHINA OPENMARKET/REPO

(Click on the following for historical data on: PBOC repo issues: PBOC repos outstanding: PBOC bill issues: PBOC bills outstanding: Reports on PBOC open market operations:)

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