China investors desert Hong Kong stocks in droves as correction fears loom

SHANGHAI, Feb 28 (Reuters) - Chinese investors dumped Hong Kong stocks for a second day on Wednesday, fearing that faster interest rate rises in the United States would kill the market's bull run.

Mainland Chinese sold a net 1.2 billion yuan ($189.60 million) of Hong Kong shares via the Shanghai-Hong Kong Stock Connect, after pulling out a record 2.9 billion yuan on Tuesday.

The heavy selling pushed the benchmark Hang Seng index down 1.4 percent, capping its worst monthly fall in two years, while the China Enterprises Index skidded 2.1 percent.

Unlike past years, the sharp correction in Hong Kong stocks has not yet drawn swarms of mainland bargain hunters, suggesting to some market watchers that a sharper slide may be on the cards.

U.S. policy tightening would reduce liquidity in Hong Kong, whose currency is pegged to the dollar.

"It's different now," said Zhu Haifeng, a once-bullish retail investor who slashed his Hong Kong equity holdings this week due to concerns of tighter liquidity.

"If the U.S. raises rates three or four times this year, the U.S. equity bubble would burst. Hong Kong stocks will be vulnerable," he said, referring to growing market fears that the Federal Reserve may have to act more aggressively to curb growing inflationary pressures.

Those fears sparked a savage global equities rout in early February, from which many markets including Hong Kong were only beginning to recover.

But markets tumbled anew on Wednesday, after new Fed Chairman Jerome Powell suggested more rate rises were possible this year.

Chinese investors are also worried about the fallout from growing Sino-U.S. trade frictions. U.S. President Donald Trump is due to decide soon whether to impose much broader duties on steel and aluminium imports under a national security investigation.

Zhu suspects the Hong Kong market, which is "at unsustainable heights," has already seen its peak.

Growing policy uncertainty in mainland China is also souring investor confidence in general.

China's ruling Communist Party on Sunday set the stage for President Xi Jinping to stay in office indefinitely, and analysts appear divided over what this means for deeper economic and financial market reforms.

Albert Xu, a strategist at Zhongtai International, attributed this week's market correction to "fear that long-term one-man-rule governance may hurt market mechanisms and capital."

But he's less pessimistic than Zhu.

"The general valuation in Hong Kong stock market is attractive comparing to the mainland markets," Zhu said, predicting the market will bounce back in 2018.

Beijing's increasingly tough crackdown on big-spending, high-profile global conglomerates has also added to market worries about regulators' prolonged campaign to reduce financial risks.

China's government on Friday seized control of Anbang Insurance Group, saying it had violated laws and regulations, while investors fear that tighter scrutiny over other acquisitive conglomerates such as HNA could lead them to dump equity stakes in other firms and make banks more wary of lending. ($1 = 6.3290 Chinese yuan renminbi) (Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill)