Stocks and commodities fell in Asia on Wednesday after China's surprise hike of banks' reserve requirements sparked investor concerns that the move could slow China's purchases of natural resources and other imported goods from Asia.
High-yielding currencies such as the Australian dollar weakened after the move by the People's Bank of China late on Tuesday, which was the strongest step to date by the central bank toward reining in asset price inflation.
Most markets recovered after an initial fall on a growing conviction that the policies confirm a broad economic recovery and were targeted at soaking up excess cash from the financial system.
Its impact on earnings and economic activity in China will not be material, said Adrian Mowat, Chief Asian and Emerging Market Equity Strategist at JPMorgan.
It is a signal that the economy is strong and the current policy is to reverse pro-growth strategies put in place in response to the credit crunch and synchronized global recession. The MSCI index of Asia Pacific stocks traded outside Japan <.MIAPJ0000PUS> was down 1.4 percent by 12:25 a.m. EST after earlier falling 1.6 percent. It had struck a 17-month high on Tuesday on optimism that a global recovery was gaining traction.
As commodity prices skidded with the index of materials stocks <.MIAPJMT00PUS> down nearly 2 percent.
Shanghai shares <.SSEC> fell as much as 2.8 percent before paring losses, while Hong Kong's Hang Seng index <.HSI> dropped 2.2 percent.
Oil weakened, with NYMEX crude futures down by more than $1 a barrel to below $80 on worries China's move would dampen demand and after an industry group reported an unexpected increase in U.S. distillate inventories.
The yen strengthened on short-covering as investors unwound trades linked to a range of higher-yielding assets.
Japanese government bonds also gained in response to weaker stocks, while U.S. Treasuries surrendered gains after a rally that took cue from weaker shares on Wall Street.
A disappointing start to the U.S. earnings season also weighed on investor sentiment with a profit warning from Chevron
Fears that China may be more forceful in cooling its economy, for example by hiking interest rates, also pulled down U.S. and European stocks. Investors worried about a slowdown in Chinese demand could hit exporters, which faced the brunt of the selling.
China's Vice Minister of Housing and Urban-Rural Development Qi Ji said on Wednesday that property prices in rich coastal cities were excessively high.
UP IN A FEW DAYS?
While China is stepping in to moderate its rapid economic growth, which has buoyed many of its neighbors, many Western countries are still trying to stimulate demand.
Even if it gradually raises interest rates, Beijing's monetary policy is likely to remain loose and pro-growth.
We have had a pretty good start to the year and the markets are retracing a little bit at the moment, said Khiem Do, head of the Asia multi-asset group at Baring Asset Management. It will last for a few days and the market will climb back up again.
Khiem Do said Wednesday's market reflected the volatility that investors can expect this year.
Chinese banking and property stocks, the industries likely to be most affected by policy curbs, led both Hong Kong and Shanghai lower, although the impact on balance sheets was seen as insignificant.
Other Asian markets are bracing for a lower Chinese demand.
Japan's Nikkei <.N225> fell 0.9 percent, with exporters and resources firms weakened by the stronger yen as China moved to tighten liquidity. Construction equipment maker Komatsu <6301.T>, which has seen Chinese sales soar, fell 2.5 percent.
Commodity-linked currencies such as the Australian and New Zealand dollar were also on the defensive following the moves by commodity-hungry China.
Shanghai aluminum was down 3.8 percent after falling by its 5 percent daily limit and zinc recovered after coming close to its downside threshold. Copper dipped 2.4 percent, having earlier dropped as much as 4.4 percent.
(Editing by Jan Dahinten)