FEARS that rising inflation will choke Asian growth have triggered a dramatic flight of foreign funds out of regional shares.

The outflow - a stark reversal of the trend a year ago - is a sign that foreign investors are no longer sold on the Asian boom story, including China's astronomical growth.

The sell-off has been widespread and has left Asian markets bleeding.

And this time, in contrast to a similar selldown in April 2006 that was followed by a sharp rebound, few believe that a fast recovery is in sight.

A Citigroup report shows that foreign fund managers have sold about US$4.66 billion (S$6.4 billion) in Asian equities this year - almost twice the US$2.48 billion they pumped in during the same period last year.

Not surprisingly, China has taken the biggest hit, with the funds offloading US$2.78 billion worth of mainland shares, helping send the Shanghai market down 46 per cent this year.

Singapore, which attracted nearly half of the net inflow of foreign funds into Asian equity markets in the first five months last year, is another underperformer.

Fund managers have sold a net US$229.8 million worth of Singapore equities this year, helping send the benchmark Straits Times Index down 13 per cent since January.

Merrill Lynch strategist Mark Matthews suggested in a report on Thursday that investor jitters over Singapore could be attributed to the vulnerability of its export-led economy to a global slowdown.

'Singapore has a larger percentage of exports-to-gross domestic product of any Asian country,' Mr Matthews noted.

But he believed that high energy prices, not an export slowdown, should be blamed for slaying the five-year-old bull market.

Crude oil is up 37 per cent this year and hit a record of nearly US$140 a barrel on Monday.

After suffering a big correction following the credit crunch and the fear of a global slowdown, Asian markets 'would have been fine without high energy prices', Mr Matthews said.

'But for the first time since the 1997-98 Asian crisis, Asia is in a sell-off mode, inspired by developments taking place in its very neighbourhood, namely energy-driven inflation.'

Crude's sharp rise is wrecking the 'outsourced business model' for low-cost manufacturers from countries such as China and this is making investors wary of Asian equities.

'Whether you are selling coiled steel or cut flowers, the cost of transport is a problem. You have to ask whether it still makes sense to ship stuff from China when the price of a sea voyage from Shanghai represents half of the value of the product,' he said.

Still, Mr Matthews was hopeful that high oil prices would encourage Asian manufacturers to embark on even more cost-cutting in order to survive to get more market share.

But it is not all gloom and doom in Asia. Among the markets tracked by Citigroup, Taiwan emerged as a bright spot with US$2.1 billion from foreign funds flowing there.

engyeow@sph.com.sg