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Financials

China, Hong Kong stocks drop over 2% as bond yields surge

* SSEC -1.8%, CSI300 -2.1%, HSI -2.4%

* HK->Shanghai Connect daily quota used -3%, Shanghai->HK daily quota used -1.8%

* FTSE China A50 -2.1%

SHANGHAI, Feb 26 (Reuters) - China and Hong Kong stocks fell sharply on Friday, in line with broader markets, as a rout in global bonds sent yields flying and dampened appetite for risky assets.

The CSI300 index was down 2.1% at 5,352.60 points at the end of the morning session, while the Shanghai Composite Index lost 1.8% to 3,519.09 points.

For the week, CSI300 slumped 7.4%, set for its worst week since Oct. 12, 2018, while the SSEC dropped 4.8%.

The Hang Seng index dropped 2.4% to 29,342.49 points, while the Hong Kong China Enterprises Index lost 2.7% to 11,404.68.

Yields on the 10-year Treasury note eased back to 1.494% from a one-year high of 1.614%, but were still up a startling 40 basis points for the month in the biggest move since 2016.

Fears over policy tightening and lofty valuations had already pummelled China’s benchmark CSI300 index, which was down nearly 10% from its record high hit earlier in the month, mainly due to heavy selling in high-flying sectors such as consumer, healthcare and new energy firms.

Analysts said the trend of China’s policy tightening is quite evident, though the PBOC would refrain from sudden shifts in order to provide stability for the market.

Adding to the pressure were worries over Sino-U.S. trade relations.

Katherine Tai, President Joe Biden’s top trade nominee, backed tariffs as a “legitimate tool” to counter China’s state-driven economic model and vowed to hold Beijing to its prior commitments.

“The correction in U.S. stocks hit sentiment, though sharp losses have prompted bargain hunting,” said Zhang Yanbing, an analyst with Zheshang Securities.

“Given the big market fluctuations caused in part by inflation fears, investor would also favour companies with high dividend yields and low valuations,” he added.

Bucking the broad drop, the CSI300 real estate index gained 0.6%, as analysts saw attractively low valuations.

“This week does not necessarily mark the end of the rally. New fund flows from retail investors could continue for a while,” said Thomas Gatley, China corporate analyst at Gavekal.

Some said the sharp selloff provided opportunities to buy on the dip.

Thomas Masi, vice president and co-portfolio manager of the GW&K Emerging Wealth Strategy, said that market fear of rising inflation - which he believes to be temporary - creates opportunities to buy into high-growth companies exposed to the world’s second-biggest economy. (Reporting by Luoyan Liu, Samuel Shen and Andrew Galbraith, Editing by Sherry Jacob-Phillips)

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