Chinese technology stocks slumped as a plan by Tencent’s major backer, Naspers-controlled Prosus, to further cut its stake in the company fuelled concerns more investors may look to take profits following a strong rally.

The Hang Seng Tech Index slid as much as 2.9% on Tuesday, most since 22 June. Tencent dropped as much as 5.8%, the most in nearly six weeks, after Prosus on Monday said it intends to sell more of the mobile gaming giant’s stake. JD.com and Bilbili were also among the biggest decliners on Tuesday.

“Tencent’s big shareholder sale is definitely hurting the whole market sentiment,” said Banny Lam, head of research at CEB International Investment. “The tech stocks have had a good rally, so it’s not surprising for us to see people taking profit or rotating among sectors.”

The Chinese tech gauge has rebounded 43% from a record low in mid-March, as investors rotate back into the sector on bets that the worst of Beijing’s crackdowns — which triggered more than a year of heavy selling — is over. A growing chorus of global investors including JPMorgan Asset Management and Goldman Sachs Group have turned more sanguine on Chinese tech giants, citing attractive valuations and supportive policies.

Still, industry insiders point to a more downbeat picture despite a softening regulatory stance. China’s strict adherence to Covid Zero policy and sporadic infections mean a full reopening may still be far away, and will likely continue to be a drag on the economy.

The sell-down plan by Prosus was taken to be “a sign from other investors that the rally had hit a near-term peak amid an uncertain macroeconomic environment and the ongoing Covid situation”, said Justin Tang, head of Asian research at United First Partners in Singapore.

Companies including Alibaba Group and Bilbili have seen their shares approach or enter technical overbought zones this month. The Hang Seng Tech Index is still up 11% this month, poised for the most in nearly two years. — Jeanny Yu, (c) 2022 Bloomberg LP