Asia Stocks Fall On Yuan, Economy Worries

Asian stocks fell on Wednesday as Beijing continued guiding the yuan lower and a survey pointed to weakness in China's services sector, while the Japanese yen drew support from risk aversion.

Talk of a possible nuclear test in North Korea further soured sentiment in Asia. South Korea's KOSPI and the won both lost about 0.6 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 1 percent.

Australian shares lost 1.3 percent. Japan's Nikkei dropped 1.1 percent.

The People's Bank of China set the yuan's midpoint rate at its weakest level in 4-1/2 years on Wednesday. China has guided the yuan steadily lower since sharply devaluing the currency last summer, rattling traders who fear it could eventually set off a round of competitive devaluations.

Some see the tactic as a desperate attempt by China to shore up its economy, prompting concerns that the world's second biggest economy could be even weaker than imagined. A weaker yuan in theory improves the competitiveness of Chinese exports but the import cost increase it inflicts on the country's manufacturers would be an unwelcome side effect.

Activity in China's services sector expanded at its slowest rate in 17 months in December, a Caixin/Markit Purchasing Managers' Index (PMI) survey showed on Wednesday, in a further indication that the world's second-largest economy may be losing steam.

Policymakers and economists have been hoping that growth in services would offset persistent weakness in Chinese manufacturing and keep the economy from cooling too sharply.

Still, Chinese equities saw modest gains as authorities continued unveiling stock-supportive measures after a 7 percent plunge on Monday rattled global markets.

Shanghai shares were last up 1.1 percent after a report that China will keep in effect a ban on share sales by listed companies' major shareholders until new rules are promulgated.

In currencies, the yen attracted bids amid the risk aversion that gripped financial markets globally from the start of 2016.

The dollar was down 0.4 percent at 118.62 yen after hitting a near three-month low of 118.35. The euro slid to a nine-month low of 127.465 yen.

The common currency rose slightly to $1.0764 as the dollar dipped against the yen, although it remained in distance of a one-month trough of $1.0711 hit overnight.

Kathy Lien, managing director of FX strategy at BK Asset Management, wrote that the U.S. and Japanese currencies were being bought because "China is in trouble, U.S. data has been disappointing, Japan refuses to increase stimulus and oil prices continue to fall, but everyone's greatest fear is that stocks have finally peaked."

In commodities, crude oil prices struggled near 11-year lows and added to the risk-off mood, with the market giving more attention to the stronger dollar and swelling U.S. inventories rather than growing tensions between Saudi Arabia and Iran.

Relations between the two major oil producers collapsed in acrimony this week after Saudi Arabia's executed a Shi'ite cleric, setting off a storm of protests in Tehran.

Brent crude stood little changed at $36.51 a barrel, in reach of the 11-year trough of $35.98 hit late last month.

Oil-linked currencies like the Canadian dollar sank deeper on shaky crude prices. Canada's loonie fell to a 12-year low of C$1.402 to the dollar overnight.

(Reporting by Shinichi Saoshiro; Editing by Eric Meijer & Kim Coghill)