By Bloomberg News

(Bloomberg) -- An abrupt selloff in Chinese technology shares pushed a key index to the brink of a bear market, amid growing concerns that authorities may impose a tax on Internet firms.

The Hang Seng Tech Index reversed an earlier gain to fall as much as 3.4% on Tuesday, briefly extending its drop to 20% from an October peak. Losses narrowed at the close, with the gauge ending down 1.1%. Kuaishou Technology, Baidu Inc. and Tencent Holdings Ltd. were among the biggest decliners.

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The sudden drop was triggered by fears that the government may raise value-added taxes on Internet firms following a recent tax increase on telecommunication firms. The decline also followed volatility on Wall Street as doubts resurfaced about the tech sector’s high valuations and reduced expectations for US interest rate cuts. After market close, state-backed Xinhua News Agency dismissed speculation of a potential levy for the gaming industry.

The sharp reversal shows “that investors have become more sensitive to any negative worries, as Chinese stocks are no longer cheap after a strong rally last year,” said Daniel So, senior trading strategist at Goldhorse Capital Management.

China’s government racked up a record budget deficit last year as spending on social welfare grew at the fastest since 2017, according to Bloomberg calculations. The government is intensifying efforts to tax its citizens’ undisclosed overseas assets in a bid to fulfill its funding needs.

Sentiment was further weighed down by Tencent handing out cash through digital red packets to drive traffic toward its artificial intelligence app Yuanbao, following similar campaigns by rivals. The move has added to concerns over an already-intense price war among China’s tech giants.

--With assistance from Winnie Hsu.

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