Chinese stocks jumped on Tuesday after the government signalled it would shift to a looser fiscal policy to shield the world's second-largest economy from the worsening trade row with Washington.

After more than a year of pushing a crackdown on dangerous debt levels in the financial system, Premier Li Keqiang said the government's "fiscal policy should be more active", according to an announcement late Monday by the State Council, or Cabinet.

Analysts said the comments marked the beginning of a widely anticipated swing away from clamping down on credit and toward stimulating the economy.

Chinese policy-makers have had their hands full juggling competing priorities: transitioning the world's second-largest economy to an expected era of slower growth, while also cleansing the financial system of dodgy credit.

That balancing act has become even more tricky as China's export engine braces for the impact of US tariffs on Chinese goods, imposed by President Donald Trump to punish Beijing for "unfair" trade practices.

Li also stressed the government would accelerate plans to reduce taxes by more than 1.1 trillion yuan ($160 billion) and to issue 1.35 trillion yuan in local government special bonds for infrastructure.

Chinese stocks, buffeted for months by the trade discord, climbed Tuesday morning.

Shanghai's key index was 1.37 percent higher in the late morning, while the Shenzhen exchange, China's second market, was up 1.35 percent.

The yuan, however, weakened slightly, moving past 6.81 to the dollar.

The yuan has fallen to its lowest levels in a year due to the trade uncertainty and expectations of fiscal stimulus, which tend to increase money supply and weaken a nation's currency.

Beijing was widely expected to ease up on the credit clampdown -- a campaign that has also weighed on Chinese stocks -- in light of the new Trump-era realities.

The State Council said China would "avoid strong stimulus" while vowing to maintain a close eye on financial system irregularities.

The message was "loud and clear", global investment bank Nomura said in a research note.

"We expect Beijing to ratchet up fiscal stimulus and credit easing in coming months," it said.

"Beijing is correct by ruling out massive stimulus for now because any fiscal stimulus would be eventually financed by a new round of monetary easing and debt accumulation."

The world's two largest economies face a potential full-blown trade war after the United States earlier this month imposed 25 percent tariffs on $34 billion of Chinese products, drawing a tit-for-tat response from Beijing.

Washington has since threatened tariffs on another $200 billion in Chinese exports.

Trump last week accused China of manipulating the yuan to shield its exporters, noting that the currency had been "dropping like a rock".

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Trump accuses China, EU of currency manipulation
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