Baku, October 20 (AZERTAC). Asian markets fell on Wednesday, following the reaction of U.S. and European markets to China`s decision to raise its benchmark interest rates by a quarter-percentage point.

Japan`s Nikkei was down a little over 2 percent, China`s Shanghai Composite Index was off 0.26 percent and Hong Kong`s Hang Seng Index fell 0.88 percent. Korea`s KOSPI was up slightly 0.54 percent and Australia`s S&P/ASX 200 was down 0.85 percent.

"This is classic risk aversion from a market that was overdone," said Kirby Daley, senior strategist at Newedge Group. "The risk appetite was overdone, particularly in equities and dollar weakness. So, it wouldn`t have taken much to tip the markets to a risk aversion correction, and that`s what we`re seeing right now. I am surprised that there wasn`t a bigger move to the downside in some of the equity markets."

China`s motivation for raising interest rates

All three American indexes logged their biggest daily drops since August 11, with the Dow Jones industrial average losing 165 points, or 1.5 percent, the S&P 500 slipping 19 points, or 1.6 percent, and the tech-heavy Nasdaq shedding 44 points, or 1.8 percent. All major stock indexes in Europe turned lower on the news, too.

The People`s Bank of China raised the rates on Tuesday, from 2.25 percent to 2.50 percent. It was the first hike since December 2007.

Unlike rate change statements from the U.S. Federal Reserve, the Chinese central bank`s statement did not give any reason for the move, nor any commentary on its economic forecast.

China`s economy has been growing rapidly even as western economies remain mired in sluggish growth. China`s gross domestic product, the broadest measure of the economy, grew at a 10.3 percent annual rate in the second quarter, compared to the 1.7 percent rate in the United States.

The sudden hike may have been to address China`s red hot growth, but it may also be an effort to cool simmering tensions with Washington.

The enormous trade imbalance between the two nations has been straining relations. In August, the U.S. trade deficit was $46.3 billion, with China accounting for $28 billion of that amount. In contrast, China reported a trade surplus in September of $16.9 billion.

U.S. officials have argued China`s yuan is undervalued, giving Chinese exporters an unfair trade advantage. U.S. lawmakers have been calling for the yuan to be revalued to help correct those trade imbalances.

Beijing has repeatedly rejected those calls, saying it would be bad for China and bad for the global recovery.

"I`m hopeful this is a tangible sign that there may be some level-headed negotiations behind the scenes that may lead to both sides making minor concessions to avoid a larger confrontation," said Daley.

But Daley said the hike could be more about China`s attempt to correct imbalances in its domestic economy.

"It`s likely it`s just a unilateral move for China to keep its asset bubbles under control, and therefore we could still be headed for a bumpy road ahead between China and the U.S.," he said.