Inflation fears stalk Asian stock markets

Asian stocks fell sharply on Tuesday, with Shanghai suffering its worst slump in a year on worries that soaring oil prices will stoke inflation and force central banks to tighten credit.

Investors were worried that rising energy costs and interest rates will hurt consumers and eat away at company profits, dealers said.

In Shanghai, share prices plunged 7.7 percent, the biggest one-day percentage loss in around one year after the Chinese central bank announced fresh credit-tightening measures to contain inflation.

Hong Kong was down 3.9 percent in late trade while Sydney ended 2.8 percent lower. Seoul shed 1.9 percent and Tokyo gave up 1.1 percent.

"Beijing's latest move on credit tightening sent further blows to the already weak market after four consecutive trading day losses," said Yan Li, an analyst with Southwest Securities in Shanghai.

She said the bank's move was a surprise as the market had not anticipated any further tightening ahead of inflation figures later this week.

The People's Bank of China hiked the reserve ratio for commercial banks for the fifth time this year, a move that is expected to curb bank lending and slow economic growth and investment flows into the stock market.

Chinese markets were closed for a public holiday on Monday, when other regional bourses tumbled after Wall Street's slide last week.

Oil prices rose in Asia on Tuesday despite efforts by leading producer Saudi Arabia to reassure consumers that it is ready to meet any increase in demand.

New York's main oil futures contract gained 71 cents to 135.06 dollars a barrel, heading back up towards Friday's record high of about 139 dollars.

Investors were waiting anxiously for trading to resume on Wall Street after Federal Reserve chairman Ben Bernanke said "upside risks" to inflation were forcing the Federal Reserve to be more vigilant.

His remarks added to speculation that the central bank may raise interest rates later this year in a policy U-turn after a string of interest rate cuts since September to try to ease a housing slump and credit crunch.

In Tokyo, the negative lead from overseas was offset somewhat by a weakening of the yen which is positive for exporters.

Some analysts also suggested that high oil prices might not be entirely bad news for an economy struggling to escape years of deflation.

"For Japan the change away from deflation to inflation generally is a positive thing," said Jesper Koll, director of Tantallon Research Japan, which is part of a Singapore-based hedge fund.

"True, there are individual companies that are being hit, but you're starting to see that the input cost increases are being transferred on" to customers, he said.

Europe's main stock markets slipped in opening deals, with London down 0.13 percent and Frankfurt 0.39 percent lower.

The dollar continued to rebound as Bernanke's remarks added to speculation about possible US rate hikes, which would be likely to attract increased investment inflows that would boost the greenback, dealers said.

The dollar rose to 106.64 yen in Tokyo afternoon trade from 106.30 in New York late on Monday. The euro slipped to 1.5612 dollars after 1.5642.

"The US authorities are now making hawkish remarks, signalling a rate hike not too far from now to combat inflation," said Hideaki Inoue, chief manager of forex trading at Mitsubishi UFJ Trust and Banking Corp.