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China: Stocks claw back losses but fear further yuan depreciation

China's benchmark Shanghai stock index slumped more than five percent on Tuesday afternoon after failing to hold above the key 4,000 point level amid lingering worries over the economy, dealers said.

[HONG KONG] Chinese stocks recouped early losses on Monday but gains were capped by fears that Beijing would let the yuan depreciate further, despite statements from the central bank last week that it sees no reason for more declines.

After ending morning trade in the red, the Shanghai Composite Index closed up 0.7 per cent at 3,994.37 points, its third consecutive session of gains.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen closed up 0.1 per cent at 4,077.87. "We believe the renminbi will still face further depreciation pressure as the weak economic environment warrants further monetary easing measures, while the US interest rate hike is likely to come as soon as next month," Alex Fan, a research director at GF Securities wrote in a research note.

The central bank has been trying to steady the yuan in recent sessions and soothe global investors' jangled nerves after it unexpectedly devalued the currency by nearly 2 per cent last Tuesday.

The yuan has moved little since Friday, but market watchers believe the currency is likely to remain under downward pressure as the economy struggles, keeping pressure on shares of Chinese importers and firms with high US dollar-denominated debt. "We forecast a cumulative 5 per cent spot devaluation from the pre-reform level," ING said in a research note, referring to last Tuesday's depreciation. "We expect damage from the financial market volatility triggered by the exchange rate reform to dent third-quarter GDP growth." Property stocks aided Monday's turnaround, with the CSI China mainland real estate index rising 2.2 per cent ahead of the release of July home price data on Tuesday.

Analysts expect prices to have risen further from the previous month on improved sales and market sentiment.

The China Securities Index 300 Health Care Index climbed 1.9 per cent.