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Chinese stocks, bonds cautiously firmer after rate cuts

An investor stands in front of an electronic board showing stock information at a brokerage house in Fuyang, Anhui province, China, October 26, 2015. REUTERS/Stringer

SHANGHAI (Reuters) - China's stocks and bonds rose on Monday, catching up with gains globally after the central bank cut interest rates late on Friday for the sixth time in less than a year to try to lift economic growth.

However, betraying concerns about the outlook for the world's second-largest economy, stock prices saw some profit taking in the afternoon to give up their highs of the day.

The CSI300 index of the largest listed companies in the Shanghai and Shenzhen stock markets closed 0.5 percent higher at 3,589.26 points.

The Shanghai Composite Index also gained 0.5 percent, to close at 3,429.58 points. Hong Kong's Hang Seng index fell 0.2 percent to 23,116.25 points.

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"The market was slightly buoyed by the central bank's rate cut. Medium and small companies, and securities companies were relatively dynamic," said Zhang Qi, an analyst at Haitong Securities in Shanghai.

The trading range of the main indexes and overall volume remained relatively narrow and light, reflecting the wariness among investors following a tumultuous mid-year when stock markets slumped 40 percent, prompting heavy-handed intervention from authorities to restore stability.

"The influence of the central bank's rate cut faded away by the afternoon. Investors are not clear about the direction of the market, which showed in the bumpy indexes," said Xiao Shijun, an analyst at Guodu Securities in Beijing.

China's central bank, the People's Bank of China, cut the one-year benchmark lending rate by 25 basis points to 4.35 percent on Saturday. It reduced the one-year benchmark deposit rate by 25 basis points to 1.50 percent.

It also removed a ceiling on deposit rates, a measure seen as aimed at ushering in more competition between Chinese banks and lead to more efficient credit pricing to reduce wasteful investment.

The measures were announced after China markets had closed on Friday, but they prompted stocks to rally globally coming a day after the European Central Bank signalled it was ready to boost stimulus.

The market slump mid year raised worries that China's economy was heading for a hard landing as growth slipped below 7 percent in the latest quarter.

Premier Li Keqiang said at the weekend that China had never said the economy must grow 7 percent this year. His comments were reported by the government ahead of a key meeting this week that will set economic and social targets for the next five years.

The yuan largely held steady on Monday even though the dollar index had risen sharply on Thursday and Friday. Yuan trade remained close to the official midpoint setting.

The spot rate opened at 6.3550 per dollar and closed at 6.3529, a drop of 29 pips from the previous close and 0.03 percent below the midpoint. The offshore yuan was priced 0.61 percent weaker than the onshore spot, at 6.3919 per dollar, relatively steady from Friday.

"So pressure for the onshore market to weaken exists. Traders are watching whether the yuan will weaken and if so, possible central bank reaction," said a trader at a major European bank in Shanghai.

The central bank has intervened repeatedly onshore and offshore to keep the yuan stable and discourage capital flight, even as it positions the currency for potential inclusion in the International Monetary Fund's currency basket.

Supporting the yuan has drained China's foreign exchange reserves, although cutting bank reserve requirements - and maintaining trade surpluses - help offset any impact on markets.

Benchmark money rates eased slightly without any major adjustments to the curve, and liquidity remained healthy, traders said.

The volume-weighted average rate of the benchmark seven-day repo, considered the best indicator of general liquidity in China, closed 3.16 basis points lower at 2.3517 percent, compared with Friday's closing average rate.

($1=6.35 yuan)

(Reporting by Pete Sweeney, Nathaniel Taplin, Lu Jianxin and the Shanghai Newsroom; Editing by Neil Fullick)