* Global markets fall as China starts tightening policy
* Commodities slide on fears Chinese demand growth will
slow
* Commodity currencies recover from overnight fall
* Stocks, commodities pare some losses after initial fall
By Umesh Desai
HONG KONG, Jan 13 (Reuters) - Chinese stocks led a drop in
Asian equities on Wednesday as Beijing's surprise hike of
banks' reserve requirements sparked investor concerns that the
move could slow the country's purchases of natural resources
and other imported goods from Asia.
European share are also expected to extend losses, with
futures for the DJ Euro Stoxx <STXEc1> falling 0.2 percent.
However, some markets recovered after an initial fall on a
growing conviction the policies confirm a broad economic
recovery and were targeted at soaking up excess cash from the
financial system.
Commodity-linked currencies such as the Australian dollar
<AUD=> recovered from their overnight tumble when they reacted
to the move by the People's Bank of China late on Tuesday, the
strongest step to date by the central bank towards reining in
asset price inflation. []
"The initial perception was China hiking the reserve ratio
would impact growth and commodity purchases, but then to think
beyond that the impact of the tightening will be very limited
in terms of the overall China growth story," said Craig Chan,
currency strategist with Nomura Securities.
Bank and property shares in Shanghai yanked the benchmark
index <> down by 3.1 percent as investors worried gains in
stocks of industries, likely to be most affected by policy
curbs, would be limited as China steps up its campaign of
clamping down on excess cash.
Hong Kong's Hang Seng index <> dropped 2.4 percent.
But analysts say the fundamental impact on the economy at
large and more specifically on corporate balance sheets, would
be limited.
"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 synchronised global
recession."
IMPROVING SENTIMENT
The MSCI index of Asia Pacific stocks traded outside Japan
<.MIAPJ0000PUS> was down 1.4 percent by 0630 GMT after earlier
falling 1.6 percent. It had struck a 17-month high on Tuesday
on optimism that a global recovery was gaining traction.
Commodity prices skidded with the index of materials stocks
<.MIAPJMT00PUS> down nearly 2 percent.
Shanghai aluminium was down 3.4 percent after falling by
its 5 percent daily limit and zinc recovered after coming close
to its downside threshold. Copper <SCFc3> dipped 2.5 percent,
having earlier dropped as much as 4.4 percent.
Oil weakened, with NYMEX crude futures <CLc1> 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 <CVX.N> following on the heels of poor results from
aluminium maker Alcoa <AA.N>. The S&P 500 ended 0.9 percent
lower. []
Investors are worried 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 and analysts say
Tuesday's tightening measure would not be the last.
"Its the first of many such measures to come. I am not
surprised, massive excess liquidity, extremely strong growth
and inflation which is rising as well. Its definitely the start
of a tightening cycle," said Nomura's Chan.
Japan's Nikkei <> fell 1.3 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 2.9 percent.
While China is stepping in to moderate its rapid economic
growth, which has buoyed many of its neighbours, 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.
(Editing by Kazunori Takada)
