MONEY MARKETS-Mixed messages from China; Japan TIBOR falls

* China's rising yields, special bills send mixed message

* China economy gathers pace, but concerns about momentum

* Japan's extended funding measures lower rates up to Dec

By Vidya Ranganathan

SINGAPORE, July 16 (Reuters) - Higher yields at China's bill auctions on Thursday, a day after the central bank announced special bill sales to banks at lower than market rates, raised doubts about how fast the authorities wanted to tighten policy.

The auctions coincided with the release of data that showed China's growth rate shooting higher, but comments from officials who raised concerns over the mix of growth and excess capacity in the system reinforced expectations that Beijing will want monetary settings to stay accomodative.

In Japan, the Bank of Japan's announcement on Wednesday that it will extend special corporate debt funding measures for banks up to December pushed short-term rates up to the end of this year slightly lower.

Fear that the measures might end in September had halted a downtrend in interbank yen rates , where the 3-month rate had been stuck around 0.56 percent since July.

The 3-month rate dropped to 0.555 percent on Thursday, although rates on the TIBOR curve beyond December stayed steady.

In China, the central bank auctioned 1-year bills at 1.5950 percent, much higher than market expectations and 9 basis points higher than last week's auction. Yields at a 3-month bill auction rose 12 bps to 1.1666 percent.

Rates have steadily climbed in China since May, and gathered speed after the People's Bank of China resumed its auctions of 1-year bills in June and made obvious its intent to rein in bank lending and credit growth.

Nonetheless, market participants were surprised when the PBOC said on Wednesday it would auction special bills worth 100 billion yuan ($15 billion) to some banks, which would bear a punitive yield of 1.5 percent. The banks ordered to buy these bills would have to pay the money by September.

No one seemed quite sure if the PBOC, alongside attempts to absorb cash from the system, was also trying to cap yields.

"The PBOC could have intended to maintain that level at least until September, so that part is surprising," said Frances Cheung, a strategist with Standard Chartered Bank. "But I still see any normalisation of money market rates as gradual."

Interest rate swaps were volatile , with one-year yuan swap moving between 1.64 and 1.74 percent. That rate has risen 50 bps since the end of June.

Cheung said she would recommend investors receive the swap rates on any uptick.

"The short end is already overpricing the tightening effect.

"If you look at the growth numbners, yes the headline growth is slightly above market expectations but inflation risk is still not a concern at this stage. And they still have a very weak labour market, still weak consumption and sluggish exports."

Second-quarter economic growth in China beat expectations at a strong 7.9 percent from a year earlier, although most of that was driven by investment powered by monetary and fiscal stimulus. [ID:nSP537798]

Royal Bank of Scotland's Chia Woon Khien said bond yields had fallen so low in China that it was not odd to see them rise this rapidly.

"Swap rates started going up in May and now bonds are being sold off as well. The situation is a bit like in Singapore and Hong Kong, where there is no fiscal risk, there is no credit risk so bond yields were going way down," she said.

In Asia's dollar funding markets, rates were barely changed after having inched up gradually this week alongside a rally in riskier assets and upbeat earnings data. In Singapore, 3-month dollars were quoted at 0.51786 percent, coming further off record lows of 0.50286 on Monday.

The spread between LIBOR and overnight-indexed swaps (OIS), the latter a measure of market expectation of policy rates, was also a shade wider at 32.6 basis points, widening from levels of tightness last seen in early 2008.

(Editing by Kim Coghill)