I just tested your example and it achieves what you want out of the box.
I can't imagine tar changes much, but, I am using "tar-1.15.1-32.el5_8".
I tarred everything in /etc
In a test folder, I created a etc symlink to a different test directory, then extracted like you said - "tar xzvf file.tar -C ./" and it followed the symlink and dumped the files in my test directory.
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