SHANGHAI: China's benchmark stock index stood on the precipice of a correction on Tuesday and blue-chip shares slumped to a 12-week low as investors fretted over the prospect of policy tightening despite a slowing economic recovery.

The sell-off in Chinese shares echoes a selling in global equities in conjunction with rising bond yields and fear that inflation will force central banks to withdraw from accommodative policies earlier than expected.

"Premature policy tightening may create downside risks for the economy but keeping policy accommodative for too long could cause the economy and market to overheat," said Michelle Qi, head of equity at Eastspring Investments in Shanghai.

"It will also be tricky trying to strike a balance between stabilising short-term growth and promoting structural reforms."

The Shanghai Composite index was down 1.82% to 3,359.29 at the end of a session that saw it flirt with small gains. It is now down 9.98% from a multi-year high touched on Feb. 18, just shy of the 10% drop typically defined as a correction.

The blue-chip CSI300 index, which fell into a correction last week, erased a small midday rise to slump further. It touched its lowest point since Dec. 15 before closing down 2.15% at 4,971.00.

The heavyweight liquor maker itself turned around from midday gains to close 1.17% lower, following a 4.86% drop on Monday. Moutai's shares have fallen more than 26% from a Feb. 18 peak.

Despite the day's losses, foreign investors remained net buyers of A-shares through the northbound Stock Connect, according to Refinitiv data.

China's yuan also whipsawed, touching a two-and-a-half-month low before recovering all its losses to trade at 6.5235 per dollar around 0730 GMT.