Chinese shares close mixed on weaker yuan

Chinese shares closed mixed on Tuesday with the benchmark Shanghai Composite Index dropping mildly to close at 3,927.91 points.

The smaller Shenzhen Component Index gained 0.15 percent to close at 13,323.09. The ChiNext Index, tracking China's Nasdaq-style board of growth enterprises, lost 0.29 percent to end at 2,698.91.

Total turnover of the two exchanges expanded to 1.34 trillion yuan (215 billion U.S. dollars), up from 1.23 trillion yuan the previous trading day.

On Tuesday, China's central bank introduced a new exchange rate formation system that resulted in a near 2-percent decline in the central parity rate of the RMB against the U.S. dollar.

Stock performance diverged on the news. Companies in the aviation sector, which tend to hold large amounts of debt valued in U.S. dollars,suffered the most with the share prices of China Eastern Airlines and China Southern Airlines tumbling more than 7 percent.

Industries that rely heavily on exports were among the biggest winners, with the textile manufacturing sector rising 4.5 percent and trade sector climbing more than 5 percent.

Wang Yang, a researcher with Guotai Junan Futures, said a weaker yuan will have a negative impact on the stock market in general as it intensifies capital outflow, draining liquidity, according to cnstock.com, an online subsidiary of Shanghai Securities News.

To offset the pressure of capital outflow, Wang said it will not be long before the central bank cuts interest rates again.

Tuesday's mixed closing prices marked the end of a two-day rally led partly by speculation about reforms of state-owned enterprises.

The benchmark Shanghai Composite Index surged 4.92 percent on Monday amid expectations that the government will reorganize SOEs to improve their competitiveness through various means, including potential mergers between large companies.

SOE investments will still be safer bets in the second half as government officials have stressed the importance of state-owned companies in reform, said Essence Securities.