By Andrew Galbraith and Winni Zhou
SHANGHAI (Reuters) - Chinese bond yields and stocks rose, while the offshore yuan weakened to a 13-month low as Beijing vowed to pursue a more 'vigorous' fiscal policy in a fresh sign that authorities are set to further loosen monetary conditions to support growth.
The market reaction underscored a broad change in direction for the country's economic managers toward policy loosening as China's growth slows, and fears grow that an increasingly heated U.S.-China trade war will further hurt output.
In early trade Tuesday, the yield on 10-year Chinese government bonds jumped 5 basis points to 3.57 percent, and were last seen at 3.56 percent.
The jump follows a steady decline in the yield on 10-year treasury bonds, fuelled by robust demand. The yield has fallen more than 50 basis points since late January, according to Thomson Reuters data.
Highly liquid 10-year policy bank bonds issued by China Development Bank also saw a spike in yields, jumping 7 basis points to 4.2525 percent early on Tuesday. At around 0413 GMT, the bonds were quoted at 4.2500 percent.
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As yields jumped, Chinese 10-year treasury futures for September delivery, the most traded contract, fell more than 0.4 percent in early deals, and were down 0.3 percent at 95.385.
On Monday, the State Council, China's cabinet, said the country would adopt a more 'vigorous' fiscal policy, while in an unexpected move, China's central bank lent 502 billion yuan ($74.36 billion) to financial institutions via its one-year medium-term lending facility (MLF), stepping up efforts to support lending as growth slowed.
The shift in focus toward easing also comes after the central bank in July released 700 billion yuan in liquidity by cutting some banks' reserve requirements, prompted by concerns over tighter cash conditions and a potential economic drag from the U.S. trade dispute. It was the third such cut this year.
Economists have not ruled out further reserve requirement reductions this year.
A trader at an Asian bank in Shanghai said bond market sentiment was weak, and that market players remained divided over the outlook for rates.
As investors sold bonds, the country's stock markets moved higher on the prospect of policy easing. The Shanghai Composite index was 1.6 percent higher at the midday break and the blue-chip CSI300 index gained 1.7 percent.
The SCI and CSI300 remain the world's worst-performing major stock indexes this year, but some investors say that fears of a rout in Chinese markets are overdone.
On top of the policy easing, analysts also cited new rules governing financial institutions' wealth management and asset management businesses for the jump in shares, noting they are less stringent than expected.
For example, the new regulations would allow publicly issued products to invest in non-standard debt products, and would lower the investment threshold for investors.
"The new rules would have comprehensive and profound impact on China's financial system, and would help reduce systemic risks" due to economic slowdown and financial deleveraging, Albert Xu, a strategist at brokerage Zhongtai International wrote in a note.
The long-awaited wealth management rules, released Friday, aim to push banks to standardise their wealth management businesses and to invest wealth-management product funds into the capital markets in a compliant way.
WEAKER YUAN
In the currency market, expectations of further policy easing piled pressure on a fragile yuan, which suffered its worst month on record in June.
The spot market opened at 6.8145 per dollar and eased to a low of 6.8295 before changing hands at 6.8103 at 0408 GMT. The offshore yuan fell nearly 0.6 percent to a low of 6.8448 per dollar, its weakest level since June 2017. It was trading at 6.8285 as of 0416 GMT.
The People's Bank of China (PBOC) had set the midpoint rate at 6.7891 per dollar ahead of the market open, its weakest since July 11, 2017. The fixing was 298 pips or 0.44 percent weaker than Monday's midpoint of 6.7593. The fixing matched market forecasts and dragged the spot rate lower.
On Monday, China said it has no intention to devalue the yuan to help exports, after Washington said it was monitoring the currency's weakness amid the escalating bilateral trade brawl.
"The market now believes that chances for the yuan to rebound are getting low, unless there would be a strong official guidance from the authorities. Tolerance is higher. Investors thought that the 6.7 per dollar was the floor, then 6.8, now both are gone," said a trader at a foreign bank in Shanghai.
She said current trade suggested the authorities remained comfortable with the losses in the currency.
(Reporting by Andrew Galbraith, Winni Zhou, Samuel Shen and Steven Bian; Editing by Shri Navaratnam)