Stocks in Asia tried to shake off losses Tuesday, but most exchanges ended in the red as markets followed in the footsteps of the U.S. indices and gave up midday momentum. Only China staged a sustaining rally, as its market finished at another all-time high.

In Korea, after rising briefly midday, the Kospi fell in line with other Asian indices, by 29.63 points, or 1.46%, to 2005.76. In Japan, the Nikkei 225 dropped 220 points, or 1.27%, to 17,137.92, while the Topix tumbled 32.19 points, or 1.9%, to 1625.25.

Japanese banks fared badly in the day's trading.

Nomura Holding

slid 0.48% to 2,070 yen after announcing it would exit the residential mortgage-backed market, while

Mizuho Financial

dropped 5% to 631,000 yen and

Mitsubishi UFJ

plummeted 6% to 1,059 yen.

Elsewhere in Japan, a stronger yen meant weakness in exporters

Sony

,

Canon

and

Toshiba

, which lost between 1.6% and 2.75%. The yen was trading 116.95 vs. dollar, up from 117.4 vs. dollar at the beginning of the trading session.

In South Korea, banks fell too, as

Kookmin

lost 2.2% to 1,700 won and

Shinhan Financial Group

plunged 4.68% to 2,900 won.

"The Korean financial system is going through a 'renovation' that will make for a negative affect on the banking system as a whole," says Shim Jae-Yoob, a buy-side analyst at Meritz Securities in Seoul. "It's not very attractive to invest at this time. Investors should stay with steel, petrochemicals and shipping instead."

It was a volatile session for China shares, with the Hang Seng reaching an intraday high of 29,763.34 before finishing at 28,954.55. In China, the Shanghai Composite Index rallied 62 points, ending up 1.03% at 6,092, the second time the composite closed above the 6,000 benchmark. Talk of a bubble around China stocks on dealing floors is steadily increasing as the big gains continue to defy regional losses.

"Short term, one can easily assume we have a bubble building up. The question is, how long will it last in '08?" says Catherine Boutet, head of Asian investments for ABN Amro. "If you look to the number of IPOs and the demand for them either in Hong Kong or the

Chinese 'A' share market, this is one thing one should keep in mind."

China shares were lifted by the banking sector after

China Merchants Bank

TheStreet Recommends

forecast that it would double net earnings on the year and

China CITIC Bank

confirmed reports that it was looking to buy a portion of

Bear Stearns

( BSC). The companies gained 2.33% to 42.08 yuan, and 2.82% to 11.68 yuan, respectively, in Shanghai trading.

Bank of China

was up by as much as 7.65% to 7.04 yuan, while $180-billion

China Life Insurance

gained 0.67% to 72 yuan, also in Shanghai.

In Hong Kong,

PetroChina

slid 2.45% to HK$18.30 after reaching an all-time intraday high of HK$19.82 in morning trading. In telecoms, China mobile continued to rally, up 1.2% to HK$143.10, while rival China Unicom shed 1.99% to HK$15.78.

The Chinese gains have defied most analysts this week as they expected China's 17th Party Congress to destabilize domestic trading. But the Congress is focused on the agricultural market, environmental issues, financial markets and corruption this year, says ABN Amro's Boutet.

"Analysts forecasts on China are always bad. They always underestimate the growth for the companies and run after it," says Boutet. "In '06 they were expecting 5% growth for earnings. Finally the companies came out with 30% growth. They were expecting 10% this year, but Hong Kong listed companies published 32%, and Chinese 'A' shares published 70% for the first half of 2007."

Another example can be found in U.S.-traded ETFs, where the

iShares MSCI Emerging Market

(EEM) - Get Report

,

iShares Hong Kong

(EWH) - Get Report

and the

iShares/FTSE Xinhua

(FXI) - Get Report

have grown much faster than analysts' forecasts this year.

"Valuations are becoming a bit stretched, but we know that analysts are lagging the growth. As a fund manager, I cannot close my eyes anymore on this aspect," she adds.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.