SHANGHAI, Aug 6 (Reuters) - China stocks fell to six-month lows on Tuesday despite a regional relief rally, and the yuan eased from Monday's seven-month high against the dollar, challenging views Chinese assets would be a safe haven from a global market rout.
But China's long-term yields jumped on fears of government-orchestrated bond selling to cool a sizzling rally, rather than a rosier economic outlook.
The Chinese and Hong Kong stock markets outperformed on Monday amid savage selling in Japan, South Korea and Taiwan but were outliers as regional markets rebounded.
The bluechip CSI 300 Index ended the session flat, dropping to its lowest since February after opening the day higher. The Shanghai Composite Index closed up 0.2%. Hong Kong's Hang Seng closed down 0.3% after falling to the lowest since April 22 in the previous session.
The onshore yuan changed hands around 7.1450 per dollar in late afternoon, sharply lower than the seven-month peak of 7.1120 hit on Monday.
Christopher Ying, investment manager at Shanghai Ju Cheng Asset Management, said he doubted China would be a safe harbour from the global decline because of its shaky fundamentals.
Investors feeling the pulse of China's economy "need to wait until the end of China's mid-year earnings season, and also the Fed rate cut expected in September," Ying said.
Some investors also attributed the stock market weakness on Tuesday to the rise in long-term yields, which could curb stock valuations.
China's 10-year treasury yield rose as much as 1.5 basis points to 2.165%, having jumped 4 bps since Friday. Futures contracts on the bond fell as much as 0.5%, and posted their biggest percentage fall in a month.
The correction in bond prices, which move inversely to yields, came after state banks were seen selling large volumes of benchmark 10-year treasuries on late Monday afternoon.
Appetite for bonds was also soured after China's central bank, the People's Bank of China (PBOC), asked some financial institutions to report daily changes in their long-term treasury bond positions and balances, suggesting closer scrutiny.
"The pullback triggered by big bank bond selling may be just a prelude … as state banks have ample ammunitions," said Yan Ziqi, an analyst at Huaan Securities.
UNDERPERFORM
Against the rest of Asia, China and Hong Kong underperformed on Tuesday with Japanese stocks soaring more than 10% after Monday's historic sell-off. Other Asian markets recovered amid soothing comments from overseas central bankers.
But Chinese equities have been underperforming versus regional markets this year that has made the market relatively immune to global volatility, said Xia Haojie, an analyst at Guosen Futures in Shenzhen.
"Chinese stocks are already lying on the floor," he said.
The lagging growth of the world's second-largest economy is at the forefront of investors' minds amid deflationary pressures, a protracted property slump, and anaemic consumption.
China's banking and insurance shares weighed on the index on Tuesday, but the impact was partly offset by a rebound in real estate stocks.
In Hong Kong, tech companies added 0.4%.
In China's bond market, traders said the PBOC's efforts to cool frenzied buying could have a short-term effect, but a correction could provide buying opportunities as more easing is expected.
China's yuan is still down 0.6% against the dollar so far this year.
But its recent recovery "has created considerable room for the PBOC to implement further easing measures in the coming months, particularly given the weak credit demand and continued deflationary pressure domestically," said Serena Zhou, senior China economist at Mizuho Securities Asia. (Reporting by Shanghai Newsroom; Editing by Christian Schmollinger and Sonali Paul)
