By Gabriel Wildau

SHANGHAI, Jan 4 (Reuters) - China's money rates dropped

sharply on Friday, as year-end cash demand waned and the market

anticipated a possible fund injection by the central bank on

Saturday.

The benchmark seven-day weighted-average repo rate fell 54 basis points to 4.04 percent near midday.

The overnight rate tumbled to 2.56 percent

from 3.86 percent at the close on Monday, the last trading

session prior to the three-day New Year holiday.

The People's Bank of China (PBOC) surveyed banks about

demand for five-day reverse bond repurchase agreements that

would be auctioned on Saturday, if demand is sufficient.

The central bank normally auctions seven-day repos on

Tuesdays and Thursdays. The unusual five-day tenor this weekend

is designed to allow the instrument to mature next Thursday, the

same day as if a seven-day reverse repo had been auctioned on

Thursday this week, when the market was closed for the New Year

holiday.

The PBOC sometimes chooses not to proceed with an auction

even after it has surveyed demand. But traders say that while

conditions have eased since Monday, several banks are still

likely to report sufficient liquidity demand to PBOC for the

auction on Saturday to go forward.

'There will be demand for five-day cash, but it won't be

especially strong,' said a trader at an Asian bank in Shanghai.

The seven-day rate hovered around 3 percent for most of last

month until Dec 20, when the traditional year-end squeeze pushed

the rate up, peaking at 4.58 percent on the last day of the

year. A rate below 3 percent is generally seen as indicating

loose conditions.

Looking forward, traders say that while rates may slide a

bit further early next week, they are likely to remain elevated

through the start of the Spring Festival holiday, which starts

on Feb. 9.

Current Prev close Change

(pct) (bps)

7-day repo 4.0418 4.5826 -54.08

7-day SHIBOR 4.0480 4.5800 -53.20

Note: Repo rate is weighted average.

To see stories on China's debt issue

For prices for central bank bills, treasury bonds and

sovereign bonds, please click,

To see a general guide to contributed price data,

news and analysis, please click

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($1 = 6.23 Chinese yuan)

(Editing by Jacqueline Wong)

Keywords: MARKETS CHINA BONDS/

(gabriel.wildau@thomsonreuters.com)(+86 21 6104-1783)(Reuters Messaging: gabriel.wildau.thomsonreuters.com@reuters.net)

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