UPDATE: Asian Shares End Down; Shanghai Stocks Lead Fall

(Updates oil and foreign exchange prices, adds late closing stock prices.)

Shanghai stocks dropped 5.8% Monday, suffering their biggest percentage drop so far this year, as lower commodity prices, persistent worries over tightening in bank loans and weak economic data dampened investor sentiment.

Hong Kong shares were also weighed down by the performance as well as a steep fall in U.S. stock futures and commodity prices. In Tokyo, exporters were dragged down by the yen's strength as risk-averse investors bought the low-yielding currency in search of a perceived safe haven.

"The U.S. fall on Friday helped to reduce the risk appetite for speculators holding Asian assets, said Ben Collett, head of cash equities at TFS Derivatives. He added, "What we're seeing is guys getting a little risk averse and cutting their losses."

China's Shanghai Composite index posted its biggest percentage drop since November and ended at 2870.63, its first close below 3,000 since the end of June. In Shenzhen, the main stock index dropped 6.6% to 955.87, while Hong Kong's Hang Seng Index skidded 3.6% to end at 20137.65, led by a slump in China-related stocks.

Metals stocks were hit hardest, with Angang Steel and Yunnan Copper dropping by the day's 10% limit in Shenzhen, while Aluminum Corp. of China and Jiangxi Copper dropped by as much in Shanghai. Sentiment was also hurt after Yunnan Copper reported a loss for the first half of the year.

"The large gains in China markets in] the first half recreated a bubble in the market, so when the government showed signs of tightening bank credit there's a selloff," said Zhang Yong, an analyst at Great Wall Securities.

The drop coincided with data showing foreign direct investment into China slumped 35.7% to $5.36 billion in July from the year-earlier period. Foreign direct investment flows for the first seven months of the year were down 20.3% compared with a year earlier, noted Moody's Economy.com economist Sherman Chan.

"As the central government is determined to achieve the annual growth target of 8%, policymakers may have to step up efforts to boost momentum in coming months," she wrote in a report.

Japan's Nikkei Stock Average of 225 companies ended down 3.1%, Australia's S&P/ASX 200 ended 1.6% lower, South Korea's Kospi ended down 2.8% and India's Sensex tumbled 4.1%. Taiwan's Taiex ended 2% lower, while New Zealand's NZX 50 lost 2.1%.

In Tokyo, data showing Japan's second-quarter gross domestic product registered its first quarterly growth in five quarters, did little for the Tokyo markets. GDP grew 0.9% from the quarter before, compared with a 1.0% rise tipped in a Dow Jones Newswires poll of economists.

Royal Bank of Scotland economist Junko Nishioka, however, noted that capital expenditure by Japanese companies dropped for a fifth straight month.

"As corporate free cash flow decreases, we expect capex to continue to contract throughout the year," said Nishioka. "Given exports started to slow down in June, especially to China, and household consumption is quite fragile due to the deterioration in the labor market, we believe GDP will slow in Q3 and beyond. In addition, the effect of the economic stimulus packages is likely to gradually diminish."

Among Japanese exporters, Sony lost 4.1% and Toyota Motor gave up 2.7%.

Among commodity-related companies, BHP Billiton lost 3% and Rio Tinto shrank 4.8% in Sydney, Tata Steel shares dropped 6.8% in Mumbai trading, Inpex gave up 4.8% in Tokyo and Korea Zinc Co. shed 5.9%.

The front-month September crude-oil contract on the New York Mercantile Exchange was trading $1.71 lower at $65.80 a barrel. On Friday, the surprise drop in the latest survey of U.S. consumer confidence triggered a selloff in oil futures, with Nymex crude losing $3.10 to $67.51 per barrel, breaking out of the $68-$70 range it's held since the start of August. Spot gold prices gave up $8.90 to $938.70 a troy ounce.

Base metals prices were lower across the board, mirrored by falls in crude oil and equities and strength in the U.S. dollar, raising concerns that this time the correction could be deeper and more extended than recent mild sell-offs.

London Metal Exchange three-month copper was at $6,057 a metric ton, down $183. On the Shanghai Futures Exchange, the benchmark November copper contract settled down 4.8% down at 47,880 yuan a metric ton. LME three-month nickel broke support at $19,000 and was down $1,075 at $18,500 on heavy volume.

The Sydney stock market performed relatively better, with Fortescue Metals up 2.9% after it struck an iron ore price deal with China. The pact is the first China has made in protracted iron ore price negotiations, and the China Iron and Steel Association said that talks are ongoing with other iron ore miners. It hopes the pact with Fortescue will be followed by other miners.

Taiwanese stocks were also weighed by worries of rising bad debt and insurance payouts because of damage and casualties from heavy floods in the southern part of the island. Waning optimism over improved trade between Taiwan and mainland China also pulled shares lower.

The South Korean market was being pulled lower by weaker-than-expected U.S. consumer sentiment data released Friday, said Lee Sun-yup at Goodmorning Shinhan Securities. KB Financial was down 4.8% and Samsung Electronics shed 2.5%. Korean Air was down 5.1% on news of Korea's first H1N1 deaths over the weekend.

In Mumbai, concerns over the impact of poor monsoon rains were in play, dragging shares of tractor maker Mahindra & Mahindra down 5.3% and motorcycle maker Hero Honda Motors 5.9% lower.

Singapore's Straits Times Index lost 3.3%, while Philippine shares slipped 2.8%. Thailand's SET Index dropped 3.4%. Markets in Indonesia were closed for a holiday.

In foreign exchange markets, the yen was stronger against the euro and the U.S. dollar. Hiroshi Maeba, a senior dealer at Nomura Securities, said Japan's GDP result had little impact on the yen was it was largely in line with expectations. He expected the dollar to be biased lower against the Japanese currency in thin trade this week, because U.S. consumer sentiment data introduced more uncertainty over the pace of the global economic recovery, to the benefit of the safe-haven yen.

The U.S. dollar was at Y94.65 from Y94.83 in late New York trade on Friday, while the euro was at Y133.06 from Y134.53, and at $1.4058 from $1.4190.