Asian markets drop as China's key index plunges 7.7 per cent after central bank tightens credit

Asian stock markets sank Tuesday, with China's most-watched index plunging 7.7 per cent as investors reacted to the country's latest move to tighten credit and restrain inflation.

Across the region, a combination of negative news left investors staggering.

Wall Street's mixed session overnight was little comfort, particularly following its heavy losses last week. The financial sector added to fears about the U.S. economy, a vital export market, after Lehman Brothers Holdings Inc. posted an unexpectedly large quarterly loss of US$2.8 billion - its first since 1994.

In China, a government order for banks to keep more deposits on hand sparked selling, giving the benchmark Shanghai Composite Index its biggest percentage decline in over a year. And oil prices remained near record levels, hovering just above US$134 a barrel amid concerns over supplies, growing global demand and other geopolitical issues.

"Investors are concerned about a total meltdown and they just want to get out of the market," said Alex Tang, head of research at Core Pacific-Yamaichi in Hong Kong.

Chinese, Hong Kong and Australia financial markets were closed Monday for national holidays, so Tuesday was the earliest chance for investors to react to Wall Street's Friday steep sell-off, which had already dragged down other regional markets the previous day.

The benchmark Shanghai Composite Index fell 257.34 points, or 7.7 per cent, to 3,072.33. It was its biggest one-day fall since it dropped 8.3 per cent on June 4, 2007. Hong Kong's Hang Seng index dropped 4.2 per cent to 23,375.52, while Australia's benchmark index fell 2.8 per cent to close at 5,437.5.

Investors in mainland China dumped bank and property shares after a weekend decision by the country's central bank to require banks to keep more deposits on hand. The measure was aimed at easing inflation that is at 12-year highs without unduly slowing the dynamic economic growth needed to create jobs.

The requirement means less money will be available for lending and investment and it signaled authorities' intentions to keep credit tight and likely hurting business for financial and real estate companies, among others.

"It's the second time in a month that the reserve-requirement ratio was raised and this deeply worries investors. The market is too weak to resist any bad news," said Wei Daoke, an analyst with Shenyin Wanguo Securities in Shanghai.

Shanghai Pudong Development Bank dropped by the daily 10 per cent limit and property developer China Vanke also tumbled 10 per cent. Airlines like Air China also fell back on worries over high oil prices, which raise operating costs.

In Australia, stocks were weighed down by both Wall Street's losses and concerns about inflation from U.S. Federal Reserve Chairman Ben Bernanke. Financial firms took a big hit, with Macquarie Group falling 7.5 per cent and National Australia Bank sinking 5.3 per cent.

Bernanke noted that soaring energy prices were raising inflation risks and said the Fed "will strongly resist" any erosion in long-term expectations for prices.

Those comments sparked speculation of a rate hike in the U.S. later this year, driving the dollar upward to a three-month high against the yen in Asia.

The dollar rose as high as 106.83 versus the yen, its highest level since Feb. 27, compared with 106.29 in New York late Monday. The euro fell to US$1.5506 from $1.5651 late Monday in New York.

Elsewhere, Tokyo's Nikkei 225 index closed down 1.1 per cent at 14,021.17 after dropping 2.1 per cent Monday.

Taiwan's benchmark index fell 2.5 per cent, and the Philippines market tumbled 3.4 per cent. In India, where the market fell 3 per cent Monday, the Sensex index fell 1.2 per cent.