By Karen Yeung

SHANGHAI, April 3 (Reuters) - How worried are China's authorities by the threat of an economic slowdown this year? An undeclared easing of monetary policy by the central bank suggests they're seriously worried.

China's money market is being flooded with funds and by one measure, policy is now as loose as it's been since mid-2007.

The easing implies that despite high inflation, at an 11-year high of 8.7 percent in February, the bond market's rally has further to run as the central bank protects economic growth in the face of the global credit crisis and a slowing U.S. economy.

The indicative five-year government bond yield has dropped to 3.84 percent from 4.29 percent at the end of 2007, and after breaking technical resistance at 3.90 percent this week, may head for its September low of 3.70 percent, some traders say

"The central bank has loosened policy so that liquidity is very ample now. Actual policy has been quite different from its declared stance," says Shi Lei, analyst at Bank of China.

The central bank continues to insist publicly -- most recently in a report this week -- that policy remains tight, in an effort to prevent consumers' expectations for inflation from rising further.

Some aspects of policy may stay fairly tight. Benchmark one-year loan and deposit rates, up about 1.5 percentage points since the central bank began its tightening cycle last year, may not be cut. Quotas for banks' new loans may be preserved, though not necessarily enforced strictly.

But in the key area of liquidity -- the amount of available funds sloshing around the money market -- the central bank has eased policy dramatically since the start of this year.

One crude way of measuring this is dividing the central bank's net quarterly drain from the system, through open market operations and reserve ratio hikes, by the quarterly increase in China's foreign exchange reserves, which represents inflows of funds from sources such as the trade surplus and investment.

This measure rose from 0.30 in the second quarter of 2007 to 0.47 in the third quarter and 1.27 in the fourth, indicating a tightening of policy.

March's foreign exchange reserves are not yet known, but assuming reserves grew at roughly the same rate as they did in January and February, the tightening measure fell back sharply in the first quarter of this year, to 0.21.

Bank of China, adjusting for seasonal factors and issues of special finance ministry bonds, reaches a similar conclusion. It estimates that after falling for seven straight quarters to roughly zero in the fourth quarter of 2007, quarter-on-quarter growth in net liquidity rebounded to 17.8 percent last quarter.

REPO RATE FALLS

A third gauge of policy is the 100-day average of the weighted average seven-day bond repurchase rate, the money market's key short-term lending rate.

After trending higher from 2.19 percent in April 2007, the average peaked at 3.43 percent in February this year and has slid since then, to 2.88 percent, its lowest level since mid-October.

This policy easing was partly in response to a short-term shock to the economy when the worst winter weather in decades disrupted transport and energy supplies across central and eastern China.

But the main reason for the easing appears to have been concern about a longer-term slowdown due to global pressures.

China International Capital Corp said this week that gross domestic product growth, 11.4 percent last year, could fall to 9.5 percent this year -- the slowest since 2002 -- and 7.5 percent next year if the government chose the wrong policy mix.

The market does not think such a sharp slowdown is likely, but the mere possibility seems to have been enough to prompt a policy shift. Growth of 7 percent is the minimum which some analysts think is needed to absorb the millions of workers migrating to China's cities annually.

Official concern at the growth outlook was seen in this week's statement by the State Council, or cabinet, of the government's working priorities for 2008.

It said authorities should not only curb inflation but also "guard against the risk of economic slowdown".

Deutsche Bank's China chief economist Jun Ma said it was the first time in six years that the cabinet formally warned of the risk of a slowdown.

Some traders think the market is now so flush with money that the central bank might actually tighten marginally this quarter.

But as long as the threat of a major economic slowdown persists, overall policy is expected to stay loose, with the central bank relying on appreciation of the yuan rather than domestic tightening to fight inflation.

"Authorities want to keep domestic consumption and investment strong to make up for an expected slowdown in exports," says Xu Jian, analyst at CICC.

Zhang Rui, analyst at Shenyin & Wanguo Securities, expects good liquidity to support a continued rise in bonds this quarter. She estimates about 230 billion yuan ($33 billion) of new money could flow into bonds during the quarter -- equivalent to roughly four months' worth of government bond auctions.