'But all this will remain of limited impact if the yuan does not accelerate its appreciation pace, not only against the US dollar, but against the euro,' he says. The latest tweak to inflation will 'definitely fuel incentives for the Chinese authorities to push up the yuan more aggressively', Mr Barbe says.

Goldman Sachs analyst Yu Song has raised his CPI inflation forecast for 2007 to 4.8 per cent from 4.5 per cent previously, and to 4.5 per cent from 4 per cent for 2008. 'We believe the central bank will probably respond with additional tightening measures, including strict control on bank lending and two more rate rises before the end of this year,' Mr Song says in a research note, published after the inflation data was released.

Ahead of the higher-than-forecast CPI figure, and yet another regulatory announcement affecting the overheated property market, investors began taking profit on the mainland's A-share market, selling the Shanghai Composite Index down from its peak of 6,092 on October16, to below 5,200 by the middle of this month.

UBS analyst Jonathan Anderson says: 'This is a drop of roughly 15 per cent, which is sufficient to raise investors' eyebrows.'

But even a major correction to the mainland's overvalued share prices will have little effect on the real economy, Mr Anderson says, because free-float A shares accounted for only 4 per cent of adjusted liquid financial wealth in 2005 and only 15 per cent of assets today.

'From this perspective, even a large downward correction in stock prices will hardly make more than a dent in private financial wealth holdings ... and will have little or no impact on the rest of the mainland economy,' Mr Anderson says.

But analysts say regardless of the inflation scare the mainland's economic engine should continue to drive growth in the region, although its growth rate may slow under the weight of the expected rate rises and credit clampdowns aimed at containing inflation.

Merrill Lynch forecasts that the mainland's GDP expansion will slow marginally from an expected full-year outcome for 2007 of 11.5 per cent, to 10.9 per cent next year and it expects Hong Kong to follow with a lower growth of 4.8 per cent against this year's expected outcome of 5.5 per cent.

However, Merrill Lynch forecasts growth in South Korea, Taiwan and Indonesia to increase marginally. That growth will continue to underpin solid corporate earnings in the region.

Following chart-topping growth in company earnings of 42.4 per cent and 33.4 per cent in Indonesia and the mainland respectively for this year, earnings growth will slow to 20.2 per cent in the mainland next year, Merrill Lynch says, but will continue at 37.5 per cent in Indonesia.

Sustained earnings growth will help underpin valuations on Asian markets that to some investors appear rich, but to Chew Soon Gek, chief investment officer Asia for Deutsche Bank Private Wealth Management, they remain attractive.

'For Asian equities our view is that valuations are slightly high, but there is plenty of liquidity to support share prices.

'Asia ex-Japan is trading at a forward price-earnings ratio of 17.5 for 2008 and at its low in mid-August this was down to about 14 times,' Ms Chew says. 'So, we have seen a rebound, but Asia has stronger growth prospects than the US or Europe, the region's companies offer higher returns on equity, and their earnings' outlook remains strong.'

In the region's equity markets, Deutsche favours North Asia - in particular Hong Kong and South Korea, she says.

'Overall for the region we remain mildly positive to bullish. We believe this will be a multiyear story, not just for 2008. And we expect Asian companies to deliver about 10 to 15 per cent earnings growth for perhaps the next two years.'

The biggest risk to this optimistic scenario, she says, is a recession in the United States, but that probability is rated at a low 30 per cent. Other risks are sustained high oil prices and inflation in the mainland.

But analysts are divided over whether a US recession will derail Asian economic growth and among those who argue that the region is becoming 'decoupled' from the US, is Peter Redward, chief economist, emerging Asia, Barclays Capital.

'The region should decouple from the US slowdown and there are a number of reasons why the environment today is very different from the '97-04 period,' Mr Redward says.

'The first factor is simply that the Asian region is now a lot bigger than it was then and is therefore less vulnerable.

'The United States is roughly a US$13.8 trillion economy against regional GDP of something like US$7.43trillion - for the 10 major Asian economies excluding Japan. But the region is gaining. There will be roughly US$1.15trillion growth for the region in 2008, which will be bigger than what the US will contribute to growth this year.'

But the share of exports from Asia to the US is declining and the mainland and the Eurozone are emerging as growing sources of final demand for Asian products, Mr Redward says.

'Taken all together, what this says to us is that we may see a moderation of growth in the region, but it will not be pernicious. The risk is that economic growth in the region may accelerate and trigger inflation concerns.'

Against this economic setting though, Barclays believes that Asian equity markets appear at least fairly valued at present and liquidity will continue to support the markets.

'We calculate that as of end-September the [Asian] region, excluding Japan, has a capitalisation of roughly US$10.5trillion against US$5trillion at the end of September last year.

'So there has been a doubling of market capitalisation in a year and we are seeing strong wealth effects arising from this,' Mr Redward says.

Investors can expect to see the region's currencies continuing to strengthen, which will favour Asian investments, Mr Redward says, but given that interest rates in this scenario will remain relatively low and growth prospects sound, both property and equity markets will benefit.

'So we would overweight Asian property and stocks,' he says.

In its Regional economic outlook: Asia & Pacific published last month, the International Monetary Fund noted that 10 years after the 1997-98 financial crisis, Asia was 'booming again'.

The outlook for next year is for only a modest reduction in growth in response to policy tightening in the major emerging markets in the region and a slowdown in foreign demand, it forecasts and, assuming that credit markets gradually normalise, the fallout from the global financial turmoil should be manageable for emerging Asia.

Moderating growth in the mainland, which now accounts for more than 40 per cent of Asia's GDP, rather than the slowdown forecast for the United States, will be behind the slower growth in Asia, according to the IMF.

Norman Villamin, head of research and strategy group investments for Citi Global Wealth Management, Asia-Pacific, forecast that the US economy will probably grow by 2.4 per cent next year against 2.1 per cent this year.

'But on the flip side excess liquidity generated in the United States, combined with China liquidity, will find its way into Asian markets and allow them to push into more significantly overvalued territory,' Mr Villamin says.

'We could perhaps see a repeat of the situation in early '94 when Asia ex-Japan peaked at around 27 to 28 times trailing earnings,' he says.

Asian markets are not cheap at present prices, Mr Villamin says, but, given the liquidity in the region, they will probably attract further support from investors next year.

'Asia has generally done well and China has done particularly well. But many forget that Southeast Asia was a market leader in the first half of this year, with Singapore and the Philippines doing particularly well.

'We see this rotation of market leaders in the region continuing into 2008, and pick Korea and Taiwan where relative values versus Asia are at some of cheapest levels.

'China will continue to get a share of liquidity flows and we will see good earnings from China corporates and the way to play this is through value on offer in Hong Kong from listed China-linked hybrids - or Hong Kong-listed companies with significant benefits arising from exposure to China,' Mr Villamin says.

Investors who are bullish about the mainland's economic outlook, but concerned about those early warning signals on inflation may want to 'roll back a little risk in their portfolios' Mr Villamin says, which they can do by using the Hong Kong market to maintain their mainland exposure while reducing the associated risks.