Asia stocks struggle as China fears weigh

Investors were cautious ahead of the conclusion of a two-day policy meeting by the US Federal Reserve, which is expected to yield little in terms of a near-term policy shift.

But markets will as usual carefully scrutinise a Fed statement after the meeting for clues on how much longer it will leave its ultra-low interest rates and easy money policy in place, and for updates on the health of the US economy.

The meeting is taking place amid a fierce Senate debate over whether Chairman Ben Bernanke should be appointed for a second termm, which has also weighed on investor confidence this week.

The euro fell to a nine-month low of ¥125.48 as investors continued to cut risky trades amid the uncertainty.

The MSCI index of Asia Pacific stocks outside Japan shed nearly 0.6%. The index slid 2% on Tuesday to its lowest in two months after China implemented a rise in bank reserve requirements to curb credit growth.

Chinese regulators have ordered banks to call back some of the loans they extended in January, ratcheting up the pressure on banks to fall in line with official lending targets, the official Securities Times reported on Wednesday.

The MSCI index of Asia Pacific stocks has tumbled nearly 9% in the past two weeks on concerns that the global recovery could be losing momentum.

Besides worries that Chinese imports may slow as policymakers try to keep the economy from overheating, investors have been plagued by worries about Greece’s high debt levels and a proposal from the White House that could break up some huge investment banks, which could slash their profits. Investors had been pricing in a smoother and stronger economic recovery this year, which would justify higher share valuations. Now that questions are growing about the pace and depth of a recovery, share prices are seen as highly vulnerable to a correction, especially after many global indexes have rallied more than 60% from lows seen in March last year.

In recent weeks, the market has been most rattled by fears that China’s move to rein in soaring bank lending to curb inflation and forestall asset bubbles could hamper global growth.

But analysts believe such fears are overdone, saying Beijing will largely stick to its pro-growth stance even though it is keen to head off inflation risks and sharp boom-bust swings in the economy.

“It is highly unlikely, in my opinion, that Beijing will drive the economy into a growth recession just to contain inflation," Stephen Jen, managing director of macroeconomics and currencies at Bluegold Capital Management, said in a note.

Shanghai shares were little changed while Hong Kong’s main index rose 0.3%.

Taiwan stocks drifted lower after suffering their worst one-day fall in six month the previous day due to fears of further tightening from Beijing and a global bout of profit taking in technology shares, which had helped lead the recent equity rally.

South Korean shares fell 0.8% and the won weakened after North and South Korean forces exchanged artillery fire near the sea border, though analysts doubted the clash between the rivals would escalate.

The dollar fell to a six-week low near ¥89.33 with traders reporting dollar sales by Japanese exporters and as the yen gained against some other currencies.

The Australian dollar rose to $0.9021 from $0.8984 after the fourth-quarter consumer price index (CPI) rose faster than forecast as the cost of housing, recreation and food all climbed.

The data set the stage for a fourth straight increase in interest rates by the central bank at a meeting next week.

Gold prices steadied near $1,100 an ounce, supported by consistent retail demand from Asia, while oil futures prices drifted lower to around $74.78 a barrel.

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