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Why a Fed delay won't stop Asia's stock slide

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Koichi Kamoshida | Getty Images

Speculation is high that the Federal Reserve may delay its widely-anticipated September rate hike on the back of fragility in global markets, but that may not be enough to halt the slide in Asia's stocks.

Instead, poliycmakers from South Korea to Singapore may resort to a combination of tinkering with taxes and lowering borrowing costs to temper frazzled nerves. During the past seven days, Japanese shares have lost 11 percent, the Shanghai Composite has tumbled 19 percent and the Australian dollar and Korean won are trading near six-year lows.

"We are going to need to see something more inspiring than the Federal Reserve holding-off on hiking rates ... We need to see something coordinated and specifically coming from Asia given this is where the concern is stemming from," said Chris Weston, chief strategist at IG Markets.

His comments came after Wall Street's sharp correction on Monday pushed market players including Barclays to delay calls for a U.S. rate hike from September to March 2016. The current risk-averse mood in markets is a reflection of a number of factors, including concerns over global growth, the slump in commodity prices, China's panicky stock markets and its recent currency devaluation. Higher rates in the U.S. would only further dim the allure of riskier Asian assets.

Read MoreChina growth panic is way overdone, experts warn

"Coordinated global efforts may be precisely what's required to back stop this frenzied capitulation from risk assets. But this does not mechanically mean that global central banks mindlessly ease policies just to placate markets," agreed Vishnu Varathan, senior economist at Mizuho Bank on Tuesday.

In China's case, monetary stimulus from the central bank isn't the sole remedy to calming jolted markets. Late on Tuesday, the People's Bank of China (PBoC) cut interest rates and lowered the reserve ratio requirement (RRR) for the second time in two months. The RRR is the amount commercial banks must set aside with the central bank, and a lower requirement typically prods banks to lend more.

But fiscal measures such as a prompt to commercial banks to increase liquidity to infrastructure projects could also help sentiment amid concerns of a hard landing, according to Weston. Data last week showed Chinese August factory sector activity contracting at its fastest pace in almost six and a half years.

Elsewhere in the region

The guidebook for policymakers to shore up assets varies depending on growth and inflation levels.

"Asia has a growth problem, but not one of acute financial stress ... Slowing growth, even from the currently subdued pace, is bound to add pressure on asset markets," HSBC economist Frederic Neumann said on Tuesday.

Thailand, Taiwan, India, South Korea, Philippines and Singapore have sufficient breathing room to loosen monetary policy to deal with tepid growth, but that's not an option for Indonesia and Malaysia, seeing as both the rupiah and ringgit are trading at seventeen-year lows,

Instead, Indonesia raised import taxes on non-inflationary goods like electronics and jewelry this week in the hopes of cutting its current account deficit - a major complaint of investors. During the second quarter, Southeast Asia's largest economy reported a deficit equivalent to 2 percent of gross domestic product, wider than the January-March period.

Meanwhile, Malaysia's fiscal position is rapidly deteriorating, with international reserves at a six-year low. But implementing implicit capital controls, such as higher hurdles for resident companies trying to move money offshore, could be a possible solution, Citi wrote in a recent note.

Read MoreWhy emerging market currencies are collapsing

A harmonious approach to future currency moves could also fend off volatility. Since Beijing shocked the world by devaluing the renminbi by 2 percent earlier this month, Asian currencies have been hit hard since China's economy represents around 44 percent of Asian GDP, according to UBS estimates.

Philippines' finance chief Cesar Purisima said over the weekend that Asia must refrain from competing with China's lower yuan, warning of higher debt service requirements and imports costs. Central bankers in Indonesia and India have also voiced their displeasure with the recent slide in their currencies and indicated that they were ready to step in if they believed markets were unusually volatile.

"We must be mindful of the trade-offs involved in using the exchange rate as a trade tool to boost competitiveness," Purisima said in a statement.