HONG KONG, May 31 (Reuters) - Hong Kong shares ended 1.9% lower on Wednesday, just shy of entering a bear market territory, hit by disappointing Chinese factory data and simmering U.S.-China disputes, which also dragged the yuan to its lowest levels since November.
All major Hong Kong indexes tumbled, following an overnight sell-off in U.S.-listed China stocks, while investors fretted about the world's second-largest economy after a plunge in the manufacturing purchasing managers' index (PMI) to a five-month low.
The Hang Seng Index (HSI) slumped nearly 3% before closing down 1.94%, taking declines from a Jan. 27 closing high to nearly 20%. If it had closed down 20%, it would confirm the HIS was in a bear market.
"The sentiment in the financial market is quite bearish. It is not clear how the government interprets the current economic condition. There is no sign of imminent policy response," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
As a result of lack of policy stimulus and in the context of an outperforming U.S. market, net exposure to China has been trended down, said Pierre Hoebrechts, head of macro research at East Eagle Asset Management.
"This is really a good representation of negative feedback loop effect."
The Hang Seng China Enterprises Index fell 1.92%, while Hong Kong-listed tech giants and major financial institutions led declines, plummeting 2% and 1.6%, respectively.
The yuan slid to a six-month low of 7.1090 per dollar and is down more than 2.6% this month.
Mainland stocks also fellwith the blue-chip CSI 300 Index dropping 1.02%, while the Shanghai Composite dipped 0.61%.
Nomura chief economist Ting Lu warned of strong headwinds from a structural property slump, a deepening global manufacturing downturn and worsening geopolitical tensions will continue to be a drag on the economic recovery.
"We expect the manufacturing PMI to remain in the contraction zone in June."
The HSI has erased almost all its gains since November, when a rally betting on China's reopening after years of stringent pandemic lockdowns began.
Lingering worries over Sino-U.S. tensions have also weighed on U.S.-listed Chinese shares, dragging down funds including the IShares MSCI China ETF and KraneShares CSI China Internet ETF.
On Wednesday, the Pentagon accused a Chinese fighter jet carried out an "unnecessarily aggressive" manoeuvre near a U.S. military plane over the South China Sea in international airspace.
Despite their cheap valuations, Hong Kong stocks are unlikely to rebound anytime soon, analysts said.
"Turnover remains low. We don't see big money coming in and buying the dip yet," said Linus Yip, chief strategist at First Shanghai Securities.
Yields on China's benchmark 10-year government bonds hovered around six-month lows of 2.72%, as weaker demand and signs of a slowing economy raised investor hopes for more monetary easing. (Reporting by Summer Zhen; additional reporting by Georgina Lee; Editing by Sonali Paul, Jamie Freed and Rashmi Aich)
