Asian stocks fell on Thursday as investors worried strong loan growth and quickening inflation in China would spur Beijing to tighten monetary policy sooner than expected, while the yen rebounded against major currencies.
European equities were set track Asia lower, with financial spreadbetters expecting Britain's FTSE 100 <.FTSE>, Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> to fall as much as 0.5 percent.
The MSCI index of Asian shares outside Japan <.MIAPJ0000PUS> shed 0.5 percent, retreating from a seven-week high touched before the release of the Chinese data, which showed stronger-than-expected growth in factory output and consumer inflation accelerating to a 16-month high.
Some economists said the central bank would probably not wait long before increasing banks' required reserves for a third time this year and perhaps even raising interest rates.
Broader losses were limited, however, by the view that gradual policy tightening in China would do little to slow its robust growth and that Asia's economic recovery remains on track.
Foreign buying of Asian stocks, particularly South Korea, Japan and India, continued unabated with data showing emerging market equity funds reported a third straight week of inflows.
Shanghai stocks <.SSEC> shed as much as 0.8 percent as investors feared that strong loan growth in February could prompt the authorities to soak up more cash from the financial system. But the market later recouped its losses to stand slightly higher, as did the Hang Seng index <.HSI> in Hong Kong.
China's central bank drained a net 82 billion yuan from money markets this week by issuing large amounts of bills, as part of its efforts to head off economic overheating and asset bubbles.
February new loans remained higher than the government intends it to be, so we expect another rise in bank reserve requirements to come very soon, almost certainly this month, said Zheng Weigang, head of investment at Shanghai Securities.
An interest rate hike will wait at least until the second quarter.
Fears that China could tighten monetary policy have fueled risk aversion in recent weeks, alongside jitters over debt problems in some European countries.
Japan's Nikkei average <.N225> bucked the regional weakness, rising 0.9 percent as exporters such as Sony <6758.T> climbed on general weakness in the yen.
Trading by foreign investors and funds backed by domestic individual investors is dominating the market now as Japanese institutional investors can't really move actively because this month is the end of the business year in Japan, said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.
The focus will be on important events in Japan, the United States and Europe all happening next week, namely the Federal Reserve and the Bank of Japan policy review as well as Greece's future plans.
EU finance ministers meet on March 16 to discuss Greece's debt problems and their exit strategies from fiscal stimulus worth hundreds of billions of euros to battle the global financial crisis.
The yen climbed after the Chinese data prompted investors to cut their long positions in higher-yielding currencies.
The dollar fell a fifth of a percent to 90.35 yen, having climbed as far as 90.83 on Wednesday, a two-week high.
But gains in the yen were expected to be limited after sources told Reuters that the Bank of Japan may ease monetary policy as early as next week as it remains under government pressure to help pull the country out of grinding deflation.
Data on Thursday showed the economy grew less than initially expected in the fourth quarter of 2009 and a broad gauge of price trends hit a record negative reading.
The euro dropped to 123.28 yen, while sterling eased to $1.4955 after an unexpected drop in British industrial production data for January released the previous day.
The Australian dollar took a knock after the Chinese data but later bounced on bets of further interest rate rises at home.
Gold regained some strength after falling to its weakest in nearly two weeks the previous day, while oil prices retreated 50 cents from an eight-week high hit on Wednesday.
(Additional reporting by Lu Jianxin in SHANGHAI and Aiko Hayashi in TOKYO; Editing by Kim Coghill)