Asian Stocks Drop Most in Two Years on Fed, China Credit

Asian stocks slumped the most in almost two years amid concerns a credit crunch in China is worsening and the Federal Reserve will reduce stimulus should the U.S. economy continue to the improve.

The MSCI Asia Pacific Index dropped 4.2 percent to 127.52 as of 5:22 p.m. in Tokyo, heading for its biggest loss since March 2011, as nine shares fell for each that rose. Hong Kong's Hang Seng Index (HSI) erased all gains since Sept. 13, when the Fed pledged to keep buying assets until it saw "ongoing, sustained improvement" in the U.S. labor market.

Chairman Ben S. Bernanke said yesterday the central bank may start dialing down its stimulus effort this year if the economy achieves the sustainable growth the Fed has sought since the recession ended in 2009. Markets across the region tumbled, with declines deepening after China's interbank interest rates climbed and a preliminary survey showed a slump in manufacturing.

"Many investors were hopeful that the party of cheap, easy money will go on for the next two years and here's the Fed signaling the bar will close soon," said Jonathan Ravelas, chief market strategist at Manila-based BDO Unibank Inc., the biggest Philippine lender by assets. "A contraction in China is going to worsen the hangover."

Japan's Topix index slipped 1.3 percent, while the Nikkei 225 Stock Average decreased 1.7 percent. South Korea's Kospi index declined 2 percent, while Taiwan's Taiex index slid 1.4 percent. Australia's S&P/ASX 200 Index dropped 2.1 percent and New Zealand's NZX 50 Index lost 1.1 percent.

Regional Rout

Equity benchmark indexes in Colombo, Sri Lanka, and Karachi, Pakistan, were the only Asia-Pacific measures to advance today. Jakarta's Composite Index (JCI) retreated 3.5 percent, Thailand's SET Index slumped 2.5 percent and the S&P BSE India Index slid 2.5 percent.

Industrial & Commercial Bank of China Ltd., Asia's biggest lender by market value, dropped 3.8 percent in Hong Kong, pacing declines among Chinese lenders. Samsung Electronics Co. (005930), the world's No. 1 smartphone maker, slipped 2.9 percent in Seoul. BHP Billiton Ltd., Australia's top oil producer and the world's biggest mining company, sank 2.6 percent as oil and metal futures decreased.

Manufacturing Slump

China's Shanghai Composite Index fell 2.8 percent as a survey from HSBC Holdings Plc and Markit Economics added to signs of a deepening slowdown in the world's second-largest economy. Hong Kong's Hang Seng Index slumped 2.9 percent, the most since July 23, to the lowest since Sept. 13. The Hang Seng China Enterprise Index, a gauge of mainland companies in the city, plunged 3.3 percent.

The nation's one-year interest-rate swap, which is used to exchange fixed payments for the floating seven-day repurchase rate, surged as much as 58 basis points to 5.05 percent, the highest since Bloomberg started tracking the data in May 2006. The seven-day repurchase rate, which measures interbank funding availability, also climbed to a seven-year high.

"There is a credit crunch in the near term," said Ben Kwong, chief operating officer at Hong Kong-based KGI Asia Ltd. "It's reflecting the government's effort to clean up outstanding financial issues. The expectation of a China slowdown is already building up. Few people will be confident that the Chinese government will be able to maintain 7.5 percent growth this year unless it introduces some stimulative measures."

Factory Decline

The preliminary reading of 48.3 for a China Purchasing Managers' Index released today by HSBC compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists. May's final reading of 49.2 was the first below 50 since October, indicating contraction.

Shares on the MSCI Asia Pacific Index yesterday traded at 12.8 times average estimated earnings compared with 14.8 for the Standard & Poor's 500 Index and 13 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg. The Hang Seng China Enterprises Index is trading for 6.9 times projected profit, compared with the three-year average of 9.5.

Futures on the Standard & Poor's 500 Index fell 0.6 percent today, indicating the gauge may extend yesterday's 1.4 percent retreat, the biggest decline this month.

Chinese Lenders

Chinese lenders and developers tumbled. ICBC, as China's biggest lender is known, sank 3.8 percent to HK$4.57, heading for its lowest close since Oct. 8. The country's No. 1 lender hasn't advanced since May 31. China Construction Bank Corp. (939) slumped 5.2 percent to to HK$5.15. China Overseas Land & Investment Ltd., the largest mainland real-estate company traded in Hong Kong, fell 6.2 percent to HK$19.14.

Exporters dropped. Samsung Electronics slipped 2.9 percent to 1.329 million won in Seoul. Canon Inc., the world's biggest camera maker, fell 1.1 percent to 3,215 yen in Tokyo. James Hardie Industries SE (JHX), a building materials supplier that gets about 70 percent of sales from the U.S., tumbled 2.8 percent to A$9.37 in Sydney.

Energy companies and raw-material producers were among the biggest losers of the 10 industry groups in the MSCI Asia Pacific Index, all of which fell at least 2.9 percent today. Crude oil headed for a second day of decline after U.S. stockpiles unexpectedly increased. Copper fell to a seven-week low, while gold slid to the lowest level in a month.

BHP Billiton sank 2.6 percent to A$32.15 in Sydney. Inpex Corp., Japan's biggest energy explorer, plunged 3.7 percent to 417,500 yen. Zijin Mining Group Co., China's largest gold producer, dropped 1.8 percent to HK$1.68 in Hong Kong.