Stocks dropped in the wake of the biggest slide on Wall Street since the mid-October downdraft as the US treasury yield curve flattened, which happens when the US economy may be crashing.
The Hang Seng Index dropped 1.62 percent, or 440 points, to 26,819 with turnover less than HK$80 billion, while index heavyweight Tencent (0700) dropped 2.25 percent, China Construction Bank (0939) slid 1.32 percent and China National Offshore Oil (0883) fell 3.76 percent.
Shares of iphone manufacturers also dropped as Apple will run discount promotions. AAC Technology (2018) decreased 3.7 percent while Tong Da Group (0698) slid 4.4 percent.
Banking shares also decreased as the Federal Reserve may slow down interest rate increases. HSBC (0005) decreased 2.64 percent, Hang Seng Bank (0011) dropped 2.14 percent and Bank of China (2388) slid 1.6 percent.
The Dow Jones Industrial Average dropped 3.1 percent or 799 points on Tuesday. The markets were closed yesterday to honor US President George HW Bush.
Meanwhile, the yuan exchange rate fluctuated yesterday. The offshore yuan once dropped 400 points but rebounded to 6.8573 yesterday, and the onshore yuan rose 209 points to 6.8569.
An inversion of two-year and 10-year yields, when 10-year bonds yield less than their two-year debt, has preceded every US recession in the past 50 years.
"The market decline in the US overnight and the flattening of the yield curve reflects that economic growth momentum is taking over as the primary concern for investors," said Tai Hui, a strategist at J.P. Morgan Asset Management.
Ten-year yields are clinging to an 11-basis-point margin over the two-year, although it was the smallest one in over a decade.
The flattening of the curve gained momentum after last week's signal by the Federal Reserve that it may be nearing the end of its three-year rate-increase cycle.
The pound touched 17-month lows of US$1.2659 on Tuesday, then recovered to trade around US$1.2734 yesterday.