In a decline reminiscent of the late February fall in Chinese equity prices, the Hang Seng plummeted 5% on Monday, 1,526 points, to 28,942.32, in the index's largest one-day point fall to date. Shares in China fell 143 points, or 2.5%, to 5,634.

The big losses were spurred by comments made by Chinese Premier Wen Jiaobao about the potential overheating of China's equity markets, and news of delays in Chinese mainland retail investors being allowed to buy Hong Kong listed shares.

"Valuations in China and India are very stretched so we do think markets are going to struggle now over the next few weeks," says Tim Rocks, a strategist at Macquarie Bank in Hong Kong. "You're going to get rounds of concern about credit losses too, and it's going to be a more challenging environment."

Momentum-driven blue chips led the selling in Hong Kong. In telecoms, China Mobile ( CHL) tumbled 7%, to HK$141.60, China Unicom ( CHU) plunged 8.3%, to HK$16.12, while China Netcom ( CN) dived 5.4%, to HK$21.05, and China Telecom ( CHA) fared similarly, down 8.5%, to HK$5.8.

In financials, China Life Insurance ( LFC) slipped 4.8%, to HK$47.80, and HSBC Holdings ( HBC) lost 1.62%, to HK$145.90.

Property stocks fared badly, too. Cheung Kong Holdings ( CHEUY) fell 5.6%, to HK$132.8, while Sun Hung Kai Properties ( SUHJY) lost 6.1%, to HK$12, and Hutchison Whampoa ( HUWHY) eased 4%, to HK$86.95. That's bad news for US-ETF iShares Hong Kong ( EWH), which is invested nearly 25% across those 3 companies.

The losses are also bad news for the iShares FTSE Xinhua ( FXI), which is invested 19% across China Mobile and China Life Insurance. However, the ETF is also invested 8.4% in the one big winner in today's trading.

PetroChina ( PTR) shares rallied in its Shanghai IPO, soaring nearly three times to 43.96 yuan, from the listing price of 16.7 yuan. That makes PetroChina the world's largest company, with a valuation of $1 trillion -- larger than Exxon ( XOM) and General Electric ( GE) combined.

PetroChina shares plummeted 8.2% in Hong Kong however, to HK$18. That bifurcated performance continued the divide in valuations between Chinese "A" share listings and Hong Kong "H" shares and talk of a bubble around the former. Despite the enormous valuation, PetroChina is not even in the top 50 global companies by sales, say analysts.

Chinese Premier Wen Jiaobao told journalists that the Chinese government "will take measures to prevent asset bubbles and avoid huge fluctuations in the stock market," according to local reports.

Wen also said that "preventing asset bubbles is like preventing inflation and it is the government's responsibility to ensure a fair, healthy and transparent stock market."

The criticism was seen as a warning that Beijing may raise interest rates higher than the expected 27 basis points this year, and hold off indefinitely on allowing Chinese mainland investors to buy Hong Kong listed shares.

Many asset mangers have been waiting for the Hang Seng to fall to 28,000, the benchmark they see as a buying opportunity. Money mangers were notably optimistic about the outlook for Hong Kong companies, but acknowledged a further short-term decline.

"Since the Hong Kong market -- mainly the Chinese "H" shares -- has run too far too soon, we expect some turbulence in the next couple of weeks and investors should prepare for some pullback of five to ten percent," says Winson Fong, chief investment officer at Societe Generale Asset Management in Hong Kong.

Wong is optimistic about the outlook for Hong Kong listed shares in the rest of the year, however. "Medium to long term we remain bullish as share value is dependant on fundamentals, which we believe are still very sound," he says.

"Considering all the positive and negative factors, the Hang Seng index should be able to end this year with a new high." The only sector Wong says is in a bubble is the tech sector, "which jumped ten or twenty times without generating any earnings."

Other strategists concur with the positive outlook, and see a buying opportunity in dual listed Hong Kong and Chinese shares, like Aluminum Corp of China ( ACH), China Life Insurance, and PetroChina.

In Korea, shares ended the day flat, down 4 points, or 0.18%, to 2,015. Japanese shares tumbled, with the Nikkei ending the day down 248 points, or 1.5%, to 16,268, and the Topix losing 25 points, or 1.6%, to 1575.

Worst hit were the financials on credit jitters, with Korean Kookmin Bank ( KB) off 4%, to 67,200 won, and Japanese bank Mitsubishi UFJ ( MTU), which declined 3.32%, to 1,072.
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.