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HONG Kong shares turned sharply lower in afternoon trading on Thursday, led by some of the year's best performers, as traders cited concerns ranging from the risks of Chinese deleveraging to a surge in the city's interbank rates.
The Hang Seng Index lost as much as 2.2 per cent, its biggest retreat since November, and closed 552 points or 1.92 per cent down at 28,159.09.
Geely Automobile, which has more that tripled this year, plunged 7.5 per cent, while Hong Kong developers declined after three-month bank borrowing costs climbed the most this year.
ZTE Corp, a telecoms equipment maker, sank 11 per cent after disappointing preliminary results.
The declines came as China's political elite gather in Beijing for a twice-a-decade meeting, with a more than three-hour speech by President Xi Jinping on Wednesday producing little in the way of trading catalysts.
Data on Thursday showed China's economic expansion broadly maintained its momentum in the third quarter, fuelled by robust factory output and consumer spending.
"Earlier, stocks had been rising because the market was expecting there to be a message out of the 19th Party Congress to support the market," said Ronald Wan, chief executive at Partners Capital International in Hong Kong.
"Now to some extent people think there haven't been any breakthroughs out of the meeting, so the market is having a pullback."
The turmoil broke a sense of bullish calm that's prevailed throughout this year in Hong Kong's stock market, with the benchmark index jumping 31 per cent through Wednesday in Asia's best performance.
Last week, it climbed above its 2015 high to return to levels not seen for a decade, as a stabilising Chinese economy and abating concern about the yuan drew investors to the offshore centre.
Mainland equities have been subdued as authorities clamped down on speculative trading.
Concern that Hong Kong borrowing costs will rise further added to the selling, Mr Wan said.
The three-month Hong Kong dollar interbank rate known as Hibor rose 3.6 basis points, the most since December, on Thursday, after the Hong Kong Monetary Authority drained HK$8 billion (S$1.4 billion) of funds from the interbank system on Wednesday.
In mid-December, when three-month Hibor jumped 23 basis points in a week, the Hang Seng Index sank 3.3 per cent in the same span.
Kenny Wen, a strategist at Sun Hung Kai Financial, said the intraday termination of callable bull/bear contracts - a popular derivative in Hong Kong that allows investors to make leveraged bets - exacerbated the decline.
The highest concentration of bullish contracts on the Hang Seng Index was among those with call prices of 28,100 to 28,199 index points, Credit Suisse Group AG data shows. The gauge fell as low as 28,094.54 on Thursday.
"Some bearish investors were looking for excuses to 'kill the bulls'," Mr Wen said.
"The termination of callable contracts deepened the declines of the benchmarks." BLOOMBERG