(Bloomberg) -- Hong Kong stocks sank the most since November as profit taking in some of the city's top performing shares sparked a wider selloff.
The Hang Seng Index dropped as much as 2.1 percent before paring declines to 1.5 percent at the close. Tencent Holdings Ltd., Galaxy Entertainment Group Ltd. and Geely Automobile Holdings Ltd. were the biggest losers on the gauge, sinking at least 3.5 percent. All but five stocks on the 50-member measure declined.
Tencent alone accounts for more than a quarter of the Hang Seng Index's 15 percent advance this year, as investors piled into China's largest Internet company. The benchmark equity gauge has lost momentum in the past month as it struggled to sustain gains above the 26,000 level. Analysts attributed the deepening of Tuesday's slump to selling of index futures after the measure fell below 25,500.
"Many investors were betting 25,500 was the supporting level for the Hang Seng Index and have bought lots of futures on it. As the index fell below that level this morning, some people panicked and chose to sell their holdings," said Kenny Wen, a strategist at Sun Hung Kai Financial Ltd. in Hong Kong.
Tencent's 4.1 percent slide pared its gain this year to 42 percent. The People's Daily blasted the company's most profitable smartphone title in an editorial, citing it as an example of how addictive games spread “negative energy” and have even led to deaths.
"Tencent is a leading stock, which is big and has been very profitable for all investors," said Ben Bei, director of Hong Kong and China strategy at CIMB Securities Ltd. "People need to think about other positive news to lift the market higher. Over the past one to two weeks the market has started to consolidate. Then it cannot break upward, so some people will take profits.”
The selloff comes amid growing concerns about risks in the world's fourth-largest equity market after a series of spectacular stock plunges. China Huishan Dairy Holdings Co. fell 85 percent in a single day in March, while a string of small cap shares collapsed last month to erase $6 trillion.
Read more about the small cap rout here
Volume in Hang Seng Index futures was 65 percent higher than the five-day average for the morning session, with activity spiking as the market sold off toward the break.
There was "a lot" of "technical selling of stock futures" once the gauge fell below 25,500 and 25,600, which "lots of index futures are tied to," said Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd. The gauge ended the day at 25,389.01.
North Korea's claim that it had successfully test-fired an intercontinental ballistic missile added to the risk-off sentiment. The missile was a newly developed ICBM that reached an altitude of 2,800 kilometers (1,740 miles) and was fired at its highest angle, an announcer said on North Korean state television.
- Galaxy Entertainment dropped 3.6% for its biggest loss in two months, while Geely lost 3.5% to trim its advance this year to 128 percent.
- AVIC Aircraft Co. rose 2.2% to its highest close since May 9 as mainland defense shares rose after North Korea's missile test. North Navigation Control Technology Co. reversed a loss in the morning to climb 3.3% for its strongest close since May 4.
- Internet game developers fell on the mainland after The People's Daily targeted Tencent. Wuhu Shunrong Sanqi Interactive Entertainment Network Technology Co. slid 5% for its biggest tumble this year, and Youzu Interactive Co. lost 4.4%.
- Energy producers gained as investors rotated into underperformers and oil climbed late Monday. PetroChina Co. and Cnooc Ltd., the biggest losers on the Hang Seng Index this year, rose more than 1.2%.
--With assistance from Michael Patterson
To contact the reporters on this story: Jeanny Yu in Hong Kong at jyu107@bloomberg.net, Justina Lee in Hong Kong at jlee1489@bloomberg.net.
To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann
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