China's bond yields jump, yuan falls on policy stimulus bets

SHANGHAI (Reuters) - Chinese government bond yields jumped and the offshore yuan hit its weakest level in more than a year on Tuesday after China's cabinet said it would pursue a more vigorous fiscal policy and as traders bet on further easing in monetary conditions.

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 an increasingly heated U.S.-China trade war will further hurt economic output.

In early trade Tuesday, the yield on 10-year Chinese government bonds jumped 5 basis points to 3.57 percent.

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.

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 last down 0.35 percent at 95.305.

On Monday, the State Council, China's cabinet, said the country would adopt a more vigorous fiscal policy, while steering clear of strong policy stimulus.

Also on Monday, 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.

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.

The People's Bank of China (PBOC) 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. The spot market opened at 6.8145 per dollar and eased to a low of 6.8295 before changing hands at 6.8123 at 0200 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 6.8265 as of 0200 GMT.

Traders said growing expectations of an easing in monetary policy piled pressure on the Chinese yuan.

Shrugging off the weaker yuan, China's stock markets rose as investors cheered the prospect of policy easing and picked up bargains. The Shanghai Composite index gained 1.1 percent and the blue-chip CSI300 index was 1.2 percent higher, but they remain the world's worst-performing major stock indexes this year.

Analysts also cited new rules governing financial institutions' wealth management and asset management businesses for the jump in shares, saying they reduce systemic risks and will help prevent financial meltdown.

The rules, released Friday, are seen as looser than expected.

(Reporting by Andrew Galbraith, Winni Zhou, Samuel Shen and Steven Bian; Editing by Shri Navaratnam)