* 10-year treasury, policy bank bonds see jump in yields

* CSI300 index gains 1.7 pct; SCI up 1.6 pct

* Offshore yuan hits 13-month low

By Andrew Galbraith and Winni Zhou

SHANGHAI, July 24 (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.

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)