Monday saw Asian markets continue the heavy declines that began at the end of last week, with trading in all exchanges sharply lower, and Hong Kong bearing out the worst of the losses.

The Hang Seng tumbled 1,091 points, or 3.7%, to 28,373.63 points, while in China the Shanghai Composite Index fell 150 points, or 2.59%, to 5,667.33 points.

Investors were notably relaxed about the big declines, however, with some saying the situation could have been worse in Hong Kong, where the Hang Seng was expected to lose up to 1,500 points.

"This is a short-term consolidation, and it's healthy because there is still a lot of liquidity in the market here," says Carmen Au-Yeung, a fund manager at $11-billion Comgest Far East in Hong Kong.

Markets were reacting to three forces, say dealers: a deep sell-off in U.S. equities on Friday, a recent run in valuations in the region, and an unwinding yen carry trade, forcing hedge funds using cheap Japanese debt to unwind many of their long positions as the yen spiked today.

The yen was trading up 0.43% vs. the dollar, to 113.71 by market close, from 114.20, at one point touching a 6-week high of 113.26.

"Hedge funds have been trading actively in China shares, borrowing from the yen to buy the equities," says Winner Lee, an associate director of BNP Paribas in Hong Kong. "Now, since the Hang Seng hit 29,000, they have been buying puts to do some shorting activity and to buy protection on their long positions."

Lee says companies most seriously hit by the downturn in regional markets will be metals producers, while those that will be buying opportunities are the big Chinese petrochemical and telecoms stocks.

Aluminum Corp of China ( ACH) plunged 5.5% in Shanghai, to 47.43 yuan, while the Hong Kong "H" shares fared similarly, down 5.8% to $HK23.45. In China, the stock has lost 17% from the record 57.42 yuan close last Monday.

In Hong Kong, China Mobile ( CHL) shed 3.6%, to HK$142.20, while rivals China Unicom ( CHU) and China Telecom ( CHA) (slipped 5.33%, and 4.13%, to HK$15.26 and HK$6.50, respectively.

China Mobile reported better than expected third-quarter earnings after the close, with net profit up 38%, to 22 billion yuan, or $2.9 billion, compared with 15.9 billion yuan, or $2.2 billion a year earlier.

PetroChina ( PTR) closed down 0.85%, to HK$18.76, after spending most of the day in the green. The company began its marketing road-show today for its Oct. 26 listing in Shanghai, which is expected to raise $7 billion to $8 billion.

In Shanghai, China Petroleum & Chemical ( SNP) lost 4.8%, to 23.61 yuan.

BNP Paribas' Lee, like most other Hong Kong investors, points out the short-term nature of this correction, and says that when these stocks do rebound, they will do so sharply and may catch sellers off-guard. She expects this process to begin after declines of a further 17%, or a level of around 23,000 for the Hang Seng.

"The buy-back will be quite substantial and aggressive when it happens, as hedge funds will need to cover their short positions," adds Lee. "The rebounds are always quite sharp."

In Korea, the Kospi plunged 3.36%, pulled into the red by steelmakers like Posco ( PKX), off 3.31% to 584,000 won, and exporters like Hyundai Motors, down 1.54% to 64,000 won.

In Japan, the Nikkei 225 lost 375 points, or 2.2%, to 16,438.47, while the Topix declined 28 points, or 1.8%, to 1563.07 points.

Exporters fared worst of all on stronger trading in the yen, with Sony ( SNE) losing 1.87% to 5,220 yen, Canon ( CAJ) diving 2.72%, to 2.855 yen, and video game maker Nintendo ( NTDOY) off 1.36%, to 65,200.

In telecoms, NTT Docomo ( DCM) began the week down 3.22%, to 150,000 yen.

Malaysia, which is due to grow 6% this year on stronger than expected exports, attempted to buck the negative trend in Asian indices. But after opening marginally up, the Kuala Lumpur Stock Exchange fell 1,936 points, or 1.41%, by the end of the day, to 1,350.81 points.

Malaysia's deputy finance minister said inflation would be "benign" this year too, at 2.5%. As one of two regional oil exporters, the country is also benefiting from the recent rise in oil prices. That may be good news for the US-ETF iShares Malaysia Free Index ( EWM).

Only Indian equities staged a comeback, with the BSE Sensex up 54 points, or 0.31%, to 17,613.99 on foreign bargain hunting. Icici Bank ( IBN) and HDFC Bank ( HDB), two of last week's biggest losers, were trading up 3.74%, and 1.12%, to 1062 rupees and 1,372.40 rupees, respectively.
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.