Chinese Stocks Sink Further as Challenges Mount

The war in Ukraine has also dented global investor sentiment and raised the potential for a new deterioration in U.S.-China relations. Meanwhile, a surge in China’s Covid-19 daily case load—which the latest figures show has more than doubled—has prompted a series of lockdowns, disrupting supply chains and casting a shadow over the economy.

“There are definitely a lot of unknowns there,” said

Mike Bailey,

director of research at FBB Capital Partners. “The question is, are you getting paid to take on that risk? The answer is ‘no,’ in our opinion.”

Mr. Bailey said that he exited from most of his exposure to China and emerging markets during the pandemic, pouring the money back into U.S. bets. He remains bearish on China.

In Asian trading hours Tuesday, Hong Kong’s benchmark Hang Seng Index sank 5.7% to its lowest close since February 2016, as tech, financial and property shares wilted. In the U.S., where some of the heaviest selling has taken place, some Chinese-listed companies recovered ground Tuesday. The Nasdaq Golden Dragon China Index, which includes China-focused U.S.-listed companies, rose 5%. Still, it has fallen 39% this year and has fallen by roughly three-quarters from its highest point.

U.S.-listed shares of

Tencent Music Entertainment Group

and

Yum China Holdings Inc.

were among stocks that rebounded in trading Tuesday, though they are still sitting on double-digit losses this year. Tencent Music rose 15%, while Yum China jumped 8.3%.

After the Securities and Exchange Commission took a step toward eventually forcing Chinese shares off U.S. exchanges, the market is worried “about potential further escalation between the U.S. and China,” said

Louisa Fok,

China equity strategist at Bank of Singapore. the private banking arm of

Oversea-Chinese Banking Corp.

Ms. Fok said investor sentiment on China was very depressed, with Chinese shares now trading at their biggest markdowns compared with other emerging markets in five or six years.

So far this year, the selloff has shaved $132 billion from the market value of

Alibaba Group Holding Ltd.

, whose U.S.-listed shares declined 1.3% on Tuesday, according to Dow Jones Market data

That built on an earlier selloff in Asia Tuesday, in which Hong Kong-listed shares in Alibaba sank 12%, while those in rival Tencent Holdings Ltd. pulled back 10%.

Shares of internet companies have been especially punished. The KraneShares CSI China Internet ETF fell 12% on Monday, its biggest one-day fall on record, to the lowest level since it started trading in 2013, according to FactSet data. It edged higher 3.6% in recent trading Tuesday.

“The decline in Chinese internet company stocks over the last 13 months has been even worse than the comparable period for U.S. tech stocks in the early 2000s,” wrote Jessica Rabe, co-founder of DataTrek Research, in a note to clients early Tuesday.

The fund has fallen roughly 79% from its all-time high, and it has been around 270 trading days since it peaked. At the same time in 2001, the tech-heavy Nasdaq had fallen around 65% from its dot-com bubble peak, according to Ms. Rabe.

Outside of tech, major losers in Asia included Ping An Insurance Group, which plummeted 13%. Real-estate stocks also retreated, with the Hang Seng Mainland Properties Index falling 11%.

The mainland Chinese CSI 300 index of blue-chip stocks listed in either Shanghai or Shenzhen fell 4.6% to register its lowest close since June 2020, with the liquor giant

Kweichow Moutai Co.

falling 5.7%.

Tuesday’s selloff came despite better-than-expected economic data, spanning areas such as industrial output and retail sales.

Write to Quentin Webb at quentin.webb@wsj.com, Gunjan Banerji at Gunjan.Banerji@wsj.com and Clarence Leong at clarence.leong@wsj.com