China leap yields, stocks up as Beijing signals policy shift

SHANGHAI (Reuters) – Chinese government bond yields rose and stocks rose on Tuesday after Beijing is likely to continue to 'vigorous' fiscal policy, as authorities stepped up efforts to support growth amid rising economic headwinds.

Expectations of further loosening in monetary conditions -month low, and underscored a broadchange in China's policy direction as fears grow that an over heated Sino-US trade war could be a blow to the economy.

"The prime minister may be concerned about the negative impact of deleveraging on growth," ANZ economists Raymond Yeung and Betty Wang said in a note.

The yield on 10-year Chinese government bonds CN10YT = RR was up 5 basis points to 3.57 percent around 0700 GMT.

The jump follows a steady decline in yield on 10-year treasury bonds, fueled by robust demand. The yield has fallen more than 50 basis points since late January, according to Thomson Reuters data.

As the U.S. Federal Reserve is set to become more global, and has attracted global currencies. The spread between 10-year Chinese and U.S. Treasuries has narrowed sharply, touching on 19-month lows on Thursday.

Borrowing costs globally jumped on Tuesday after speculation that the Bank of Japan is close to announcing monetary stimulus.

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 slowed 502 trillion yuan ($ 74.36 billion) to financial institutions via its one- medium-term lending facility (MLF), stepping up efforts to support lending as growth slowed.

The State Council's statements on the growth of 1.4 trillion yuan in infrastructure.

The shift in focus towards easing also comes after the release of 700 trillion 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 this year.

While China has forged a wide monetary loosening a multi-year effort to combat excessive financial risks, the country's economic data showed signs of weakness even before the latest ratcheting up of trade war tensions.

The world's second-largest economy grew more slowly in the second quarter and was weakened by two-year-olds, pointing to weaker exports and investment.

On Tuesday, a trader at an Asian bank in Shanghai said bond market sentiment was weak, and that market players were 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 .SSEC and the blue-chip CSI300 index .CSI300 both closed up 1.6 percent.

The SCI and CSI300 remain the world's worst-performing major stock indexes this year, but some investors say that they are overdone.

On top of the policy easing, badysts also cited new rules governing financial institutions' wealth management and badet management businesses for the jump in shares, noting that they are less likely than expected and would like to reduce systemic risks.

The long-awaited wealth management rules, released on Friday, aim to push banks to standardize their wealth management businesses and to invest wealth-management product funds into the capital markets in a compliant way.

YUAN WEAKNESS

In the currency market, expectations of further policy easing piled up on a fragile yuan, which suffered its worst month on record in June. The spot market CNY = CFXS opened at 6.8145 per dollar and eased to a low of 6.8295. It was changing hands at 6.8230 at 0700 GMT. The offshore yuan CNH = D3 fell nearly 0.6 percent to a low of 6.8448 per dollar, its weakest level since June 2017. It was trading at 6.8407 as of 0703 GMT.

The People's Bank of China (PBOC) had the lowest rate CNY = PBOC at 6.7891 per dollar ahead of the open market, 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 of devaluing 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 the chances for the yuan are getting low, but there would be strong official guidance from the authorities. Tolerance is higher. Investors thought that the 6.8 per cent was the floor, then 6.8, now both are gone, "said a trader at a foreign bank in Shanghai.

She said the current trade suggests the authorities remained comfortable with the losses in the currency.