Asian stocks began the day in the red after Wall Street's sharp selloff but ended mixed as credit fears eased following an announcement by Citigroup (C) that it will receive a $7.5 billion cash infusion from Abu Dhabi's government.

In Japan, stocks finished up after the yen weakened for a second day running, with the Nikkei 87.64 points higher, or 0.6%, at 15,222. In South Korea, the Kospi followed Japan's mild lead, gaining 4.46 points, or 0.24%, to 1859. After falling 2.2% at the open, the Hang Seng recovered a bit, but could not finish higher after Monday's big gains, losing 416 points, or 1.51%, to 27,210. The Shanghai Composite Index tumbled 98 points, or 2%, to 4861, its lowest level since August.

"There's huge confusion with the winter fog descending on a sea of uncertain valuations, making markets extremely difficult to chart right now," says Justin Urquhart-Stewart, a director of global investor Seven Investment Management in London. "Bulls would say the growth in China leads everything else, but of course it is impacted from a slow-down in growth in the United States as exports are affected."

In India, the Bombay Sensitive Index lost 119 points, or 0.62%, to 19,127, led by weaker financials. After falling 1.5% earlier in the day, HDFC Bank ( HBD) bank lost 0.7%, to 1,632 rupees, while Icici Bank ( IBN) shed 2.2%, to 1,132 rupees.

In Hong Kong, oil stocks broadly declined after speculation yesterday that OPEC will raise output when it meets in Abu Dhabi next week. PetroChina ( PTR) slumped 3.17%, to HK$14.66, and Sinopec Shanghai Petrochemical ( SHL) lost 2.5%, to HK$11.02, while in China, China Petroleum and Chemical ( SNP) dived 4.35%, to 20.91 yuan.

Hong Kong telecoms were also off, as investors booked profits on yesterday's big gains. China Mobile ( CHL) slipped 1.6%, to HK$132.70, China Unicom ( CHU) fell 1.93%, to HK$15.28, while China Netcom ( CN) dipped 2.7%, to HK$21.30. Only China Telecom ( CHA) finished in the green, rising 0.2%, to HK$5.72.

In financial and real estate stocks, China Life Insurance ( LFC) fell 2.9%, to HK$40, while HSBC Holdings ( HBC) gave up 2%, to HK$130.90, and Cheung Kong ( CHEUY) lost 1.4%, to HK$138.

The yuan continued to strengthen, reaching an all-time high of 7.3917 vs. the dollar. The yuan is nearing what some market commentators have been predicting recently as a new benchmark of 7 yuan for every greenback.

Urquhart Stewart says that the Chinese currency's future movements boil down to whether "sense prevails", and that the Chinese heed U.S. Treasury Secretary Hank Paulson's advice to let the yuan naturally appreciate faster.

"The issue is to what extent America has decoupled from China," says Urquhart-Stewart. "A lot will depend upon the rationale the Chinese apply on the revaluation of the yuan and if it's in their interest to retain U.S. dollar reserves."

In Japan, the yen eased to 108.21 vs. the dollar, from 107.86 in Monday's trading, helping exporters in Japan gain for the day.

Honda ( HMC) rose 0.54%, to 3,660 yen, Toyota ( TM) gained 1.8%, to 6,100 yen, while NTT Docomo climbed 1.21%, to 167,000 yen, and Canon ( CAJ) bounced 0.53%, to 5,610 yen. Canon's shares have declined 25% so far this year to a 52-week low, and some market participants now say that with Christmas and New Year sales coming up, the stock represents value at current levels.

Sony ( SNE) soared 4.5%, to 5,750 yen, after the $13-billion-valued Dubai International Capital was reported to have taken as much as a 1% stake in the electronics giant on Monday.

In Korea, Samsung lost 2%, to 52,900, after it was announced that several senior executives are being investigated on charges of allegedly using shareholder's capital to fuel a personal "slush fund" worth up to 200 billion won, or $215 million.

In other trading, Kookmin Bank ( KB) closed down 0.6%, at 63,900 won, while Posco ( PKX) lost 2%, to 574,000 won and Pohang Coasted Steel slipped 1.8%, to 22,300 won.

Shim Jae-Youb, a buy-side analyst at Meritz Securities in Seoul, says that foreign selling in Korean steel stocks has unfairly punished valuations, which are now attractive.

"The steel sector is strong and in 2008 the steel price will rise on increased demand," says Jae-Youb. "There are lots of customers in Asia for Korean steel companies, which is very good news, and demand from China in particular is strong."

When the Hang Seng saw record highs in September, South Korean shares also hit all-time highs, as Chinese bargain hunters rushed to find value in the region. Now, says Jae-Youb, foreign investors are selling their holdings, but domestic share-buying remains strong.

"Foreign investors will continue to sell stocks more and more, but the Korean domestic investors will continue allocating money to buying. Domestic investors have lots of money to invest right now," adds Jae-Youb.

Similar disparities between foreign selling and domestic buying are contributing to increasing volatility in Asian markets in general, say market participants.

"Right now, I regard Asia as highly overvalued," says Seven Investment Management's Urquhart-Stewart.

In particular, Urquhart-Stewart points out that investors should not correlate Asia's growth with China's soaring stock market valuations, and that the wide disparity between Hong Kong and Chinese valuations will even out over time.

"The domestic economies bear no resemblance to China's markets, which are glorified gambling dens with ludicrously bubbled valuations that have no relation to reality," he says.

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.

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