Asian stocks touch three-month low, China woes remain in spotlight

By Shinichi Saoshiro

TOKYO (Reuters) - Asian stocks touched a three-month low early on Thursday as worries about the Chinese economy, reflected recently in a sharply lower yuan, kept investors nervous.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) dipped 0.1 percent, brushing its lowest level since late September. The index has lost about five percent so far this week.

Japan's Nikkei (N225) shed 0.5 percent and struggled just above a three-month trough. Australian shares (AXJO) dipped 0.1 percent.

Financial markets fear the yuan's rapid depreciation may mean China's economy is even weaker than had been imagined, and could therefore spark another wave of competitive devaluations around Asia and in other key economies.

Shaking investor sentiment, the People's Bank of China (PBOC) has set a weaker yuan guidance rate for seven consecutive days, pushing offshore yuan to its lowest level since trading started in 2010. Focus was on whether the PBOC would set yet another lower midpoint for the yuan later in the session.

"The Chinese yuan is smack bang at the heart of concerns and much has been made of the comments in the China Securities Journal that the weakness in the CNY is not actually causing instability," wrote Chris Weston, chief market strategist at IG in Melbourne.

"This is key, and traders feel this portrays more CNY weakness to come and therefore additional strain on the global economy, not to mention corporate China."

Wall Street shares closed at three-month lows overnight amid the general risk aversion, amplified by a continuing decline in crude oil prices and geopolitical concerns following North Korea's nuclear test on Wednesday.

U.S. Treasuries gained from a consequent flight to quality. The benchmark 10-year note yield (US10YT=RR) sank 7 basis points overnight to its lowest since mid-December.

The yen, another beneficiary in times of perceived global turmoil, also attracted bids. The dollar fell to a 2-1/2-month low of 118.25 yen overnight before pulling back a touch to 118.65 early on Thursday.

The Australian dollar, often used as a proxy for China-related trades, hovered within reach of a two-month low of $0.7048 struck overnight.

In commodities, Brent crude slid below the $35 per barrel threshold overnight to an 11-year low as data showed a surprisingly big build-up of U.S. gasoline stocks, adding to fears of a growing global glut.

The crude oil market has so far shrugged off rising geopolitical risks such as tensions between Saudi Arabia and Iran, and North Korea's nuclear test.

U.S. crude (CLc1) struggled just above a seven-year trough of $33.77 per barrel plumbed overnight.