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

Adds details and updates closing prices

SHANGHAI, Feb 20 (Reuters) - China and Hong Kong stocks dropped on Thursday following U.S. President Donald Trump's fresh tariff threats, though losses were limited as analysts said the rally in Chinese stocks, driven by the DeepSeek breakthrough, still has momentum.

China's blue-chip CSI300 Index .CSI300 ended the session down 0.3%, while the Shanghai Composite Index .SSEC was flat, as Beijing left benchmark lending rates unchanged at the monthly fixing.

Hong Kong's benchmark Hang Seng Index .HSI declined 1.6%, dragged by a sharp correction in technology stocks.

Markets in Asia wobbled after Trump said 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.

Markets dropped as traders locked in profits after recent gains, underpinned by Chinese tech shares following the success of start-up DeepSeek, whose low-cost, breakthrough AI model made a global impact.

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 pledge 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, stocks from internet healthcare .CSI930720, big data .CSI930745 and telecom services .CSI932140 continue to power ahead, but cloud computing .CSI930851 and AI plays .CSI930713 weakened.

In Hong Kong, the Hang Seng Tech Index .HSTECH dropped 3% in its worst day in three months, but is still up 20% so far this month.