UPDATE: Asian Shares Fall; Concerns On China Bank Lending

SINGAPORE -- Asian stock markets were turning lower Friday amid concerns China might be moving to tighten bank lending, with jitters also creeping into foreign exchange trade.

Australia's S&P/ASX 200 was down 2.5% with Japan's Nikkei 225 down 2.1% and South Korea's Kospi Composite off 0.4%. Hong Kong's Hang Seng Index was down 1.3%, with Taiwan shares off 0.1%.

The Shanghai Composite Index was 0.7% higher by the market interval there, though off its morning highs.

Traders cited a report by Bloomberg which quoted people familiar with the matter as saying China planned to tighten capital requirements for banks. It said the China Banking Regulatory Commission had sent a draft of rule changes to banks on Aug. 19, requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital.

There's little in the way of concrete data, but many China-watchers believe a large amount of bank lending has found its way into the stock market in recent months.

Concerns that China might slow this lending flood, at a time doubts are starting to come in about the strength of the economic recovery, were felt also in currency trade, with the U.S. dollar falling against the Japanese yen to its lowest level in more than a month.

The yield on the U.S. 10-year Treasury note fell to 3.38% in Tokyo, from 3.43% earlier, another indication of risk aversion. U.S. stock futures were down in screen trade, with Dow Jones Industrial Average futures falling 58 points.

Investors were likely to take their cue from where Shanghai shares headed in the afternoon session, given offshore market players tend to view that bourse as a bellwether for sentiment on the Chinese economy.

"In the last two weeks the index has lost more than 20% of its value - and needless to say investors are wondering if this is once again a harbinger of a sharp turn in China's real economic fortunes," said UBS economist Jonathan Anderson.

In Hong Kong, China Mobile was down 3.6% and responsible for a fair bit of the HSI's fall. That was after the company's first half results late Thursday showed a slowdown in profit growth.

Industrial & Commercial Bank of China though gained 1.2% after the largest Chinese lender by assets posted better-than-expected first half earnings, helped by a surge in lending and higher fee-based income.

In Australia, stocks were pressured after the country's Future Fund said late Thursday it sold down 34% of its Telstra Corp. holding, after an underwritten share sale to institutional investors. Investors were worried that funds would have to lighten stock holdings to raise cash to pick up the Telstra shares. Telstra was 3.8% lower.

Australian bank shares were also falling, with ANZ off 4.3%, National Australia Bank off 4.8% and Westpac down 4.1%.

Rio Tinto fell 1.4% after earnings for the first half of the year released late Thursday came in below expectations. Citigroup analysts said the results capped a tough period for the miner but better times may lie ahead - "with the balance sheet repaired, (metals) prices rallying and costs falling, the second half of 2009 and the 2010 year look much rosier."

Japanese stocks were weighed by a rising yen, plus weakness in carmakers with the ending of the U.S. government's cash-for-clunkers incentive program on Monday. Toyota Motor was down 2.7% while Honda Motor lost 3.5%.

The plastics sector was supporting in Taiwan, with Formosa Chemicals up 2.8% on upbeat second quarter profit guidance.

In New Zealand, Telecom was 1.9% lower after posting fourth quarter results which were in line with expectations. The NZX-50 index was down 0.8%.

Malaysian shares were flat with India's Sensex off 1.1%, Indonesian shares off 0.4%, Singapore's Straits Times Index down 0.8% and Thai shares off 0.2%. Philippine markets were shut for a holiday.

In foreign exchange markets the U.S. dollar fell to Y93.48, from Y94.21 late in New York, with the euro down at Y133.10, from Y134.29, and at $1.4221, from $1.4257.

The move into the yen - viewed as a safe-haven currency - also prompted weakness in the Australian dollar, which fell against the U.S. dollar to A$0.8233. The New Zealand dollar dropped by about 30 pips to US$0.6733.

Nomura chief economist Stephen Roberts however said further declines in the Australian dollar should be limited. "There's some signs that credit growth in China has already come back from the levels concerning authorities before," he said.

Lead September Japanese government bond futures rose above 139 for the first time since March 26, adding 0.55 to 139.30 points.

LME copper was at $5,985 per ton, down $64 from the London kerb with spot gold at $940.40 per troy ounce, down 40 cents from New York levels.

Commonwealth Bank of Australia analyst David Moore said the recent rally in copper was running ahead of fundamentals and expected a correction to slightly above $5,000 in the next three to six months. "Chinese imports are shifting to a lower gear and OECD demand recovery won't fit so hand in glove (to pick up where China is leaving off)."

The October Nymex crude oil contract was 20 cents lower at $72.71 per barrel on Globex.