China, Hong Kong stocks drop on Trump's fresh tariff threats, tech drag

SHANGHAI, Feb 20 (Reuters) - China and Hong Kong stocks dropped on Thursday after U.S. President Donald Trump's fresh tariff plans, but losses were limited as analysts said the Chinese stocks rally - triggered by the DeepSeek breakthrough - still has legs to run.

China's blue-chip CSI300 Index .CSI300 fell 0.4% by the lunch break, while the Shanghai Composite Index .SSEC dipped 0.2%, as China left benchmark lending rates unchanged at the monthly fixing.

In Hong Kong, the benchmark Hang Seng Index .HSI was down 1.4%, dragged by a sharp correction in technology stocks.

Markets in Asia wobbled after Trump said on Wednesday he would announce tariffs related to lumber, cars, semiconductors and pharmaceuticals "over the next month or sooner."

Highlighting growing Sino-U.S. frictions, China condemned tariffs launched or threatened by Trump at a World Trade Organization meeting. The U.S. has announced sweeping 10% tariffs on all Chinese imports.

The market weakness was also driven by profit-taking after sharp gains in Chinese tech shares triggered by the success of start-up DeepSeek, whose low-cost, breakthrough AI model shocked the world.

But investments banks, including Morgan Stanley, see further upside in China stocks.

The Wall Street Bank upgraded MSCI China and the Hang Seng Index, citing better corporate governance, improved geopolitical conditions, and Beijing's vow to support the private sector.

"We believe a structural regime shift is finally happening within China's equity market, especially the offshore space," Morgan Stanley said in a report. "We move from being deeply sceptical to cautiously more optimistic."

In a sign of performance divergence within China's tech sector, Internet healthcare .CSI930720, big data .CSI930745 and telecom services .CSI932140 stocks continue to power ahead, but cloud computing .CSI930851 and AI plays .CSI930713 dropped.

In Hong Kong, the Hang Seng Tech Index .HSTECH dropped 2.2%, but is still up 20% so far this month.