(Bloomberg) -- Tech shares led a broad slump in Chinese stocks Wednesday, as investors turned cautious over worries about the nation’s fragile economic recovery and potential market impact from US inflation data.

Hong Kong’s Hang Seng Tech Index dropped 2.8%, with electric vehicle makers Nio Inc. and XPeng Inc. the worst performers. The benchmark Hang Seng Index slid 2%. On the mainland, the CSI 300 Index closed 1.1% lower, poised for a sixth week of declines.  

Chinese stocks are facing renewed selling pressure this week as concerns about slowing growth coupled with rising geopolitical tensions add pressure. An acceleration in the nation’s consumer inflation has prompted traders to reassess policy easing prospects, while caution prevailed ahead of a US CPI report. And while the risk of war is deemed low, the dispute between Beijing and Taipei is spurring risk-off sentiment. 

Macro-economic headwinds linked to Covid restrictions are piling on pressure on Chinese equities, said Andy Wong, a fund manager at LW Asset Management Advisors Ltd., who added that authorities not sticking to the 5.5% GDP growth target and “the Covid flare-ups in the mainland also add to investors concerns about slower economic growth recovery.” 

That means EV consumption might not be as strong as investors had expected, Wong said.   

Outlook

The outlook for stocks remains dim, even as authorities work to shore up confidence. In addition to the Covid Zero policy that’s triggering sporadic lockdowns across the nation, the deepening housing crisis also weighs on economic growth. A ratcheting up of geopolitical hostilities may force traders to assign an additional risk premium for stocks in China and Taiwan. 

READ: Chinese Stocks Are Now as Cheap as Taiwan’s Amid Tensions: Chart

Just last week, Morgan Stanley recommended “staying on the sidelines at the index level” until August or early September amid a number of unfavorable conditions. 

China’s economy rebounded in June but momentum slowed in July despite government support since late May. “The market worries about more negative (news) to come,” according to Steven Leung, an executive director at UOB Kay Hian in Hong Kong.

The next catalyst will likely be how earnings season unfolds for many of the biggest Chinese companies. 

Nio Inc.’s results are expected as early as Thursday, while Li Auto Inc. is slated to report on the coming Monday. The majority of the Chinese internet firms will report later this month. As a whole, China’s corporate earnings for the second quarter are set to be the worst since early 2020. 

READ: A Silver Lining in China’s Grim Company Profits: Earnings Watch

(Updates with Wednesday’s closing prices)

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