EMERGING MARKETS-China bears maul stocks, inflation claws currencies

* China’s yuan falls sparking nerves of currency war

* EM stocks fall for third straight day, bears on the prowl

* Bahrain bonds boosted by aid pledge

* India rupee, Turkey lira hit by inflation angst

By Marc Jones

LONDON, June 27 (Reuters) - China bears clawed emerging markets on Wednesday, after the country’s main stock markets dropped over 2 percent and a fresh fall in the yuan fanned worries it was fast becoming a weapon in the U.S. trade war.

Having officially entered ‘bear’ market territory this week after a more than 20 percent fall, it was another turbulent day for China’s big bourses and those around it from Hong Kong to Hanoi.

The ripples went much further afield though. South African and Czech stocks were both down 1 percent and MSCI’s 24-country EM index fell for a third straight day having lost 17 percent itself since the year’s highs.

What looked even more significant was the sight of China’s yuan weakening beyond a psychologically key 6.6 per dollar level for the first time in six months. It has lost 3.5 percent in the last two weeks and over 5 percent since late April.

The People’s Bank of China (PBOC) had fixed the yuan midpoint at a six-month low of 6.5569 per dollar. That was down 0.6 percent from the previous fix but actually a little firmer than market expectations.

“It is clear that over the last weak you have seen a difference in the behaviour in the yuan,” said UniCredit EM FX strategist Kiran Kowshik, highlighting its reaction to three factors - a change in tack from the PBOC, weak data and the U.S. trade tensions.

“All these things have come together and the trade weighted yuan has depreciated and I think the market is extremely spooked by that.”

There were some pockets of positivity away from the China stresses.

Bahrain’s dollar bonds rebounded sharply after Saudi Arabia, United Arab Emirates and Kuwait pledged to support the country financially following months of rising stress on its pegged currency.

The country’s 2023 maturing bond jumped 4.5 cents to 92.9 cents in the dollar according to Tradeweb, while a 2022 one rose 4.3 cents to 94.82 cents. CDS prices, which investors use as insurance, also eased sharply.

Back among the main pressure points though there was no sign of respite.

India’s rupee fell to a near 19-month low in late Asian trading as higher oil prices added to concerns about rising inflation.

Turkey, another big oil importer, saw the lira drop sharply again after it had popped higher on Tuesday , while South Africa’s rand also wilted badly.

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