China’s Hong Kong-listed technology stocks slid into bear market territory on Thursday, marking a sharp reversal from last year’s rally as tax worries and global risk aversion rattles investor confidence.

The Hang Seng Tech Index, which is dominated by mainland Chinese tech firms, fell more than 1%, taking the index down a little over 20% from its October peak. The index is down for a sixth straight session.

Market participants pointed to fears of a possible increase in value-added tax on internet services as a key trigger for the recent decline. The anxiety follows a VAT increase that has already been implemented on certain telecom services, raising worries that internet platforms could be next.

Speculation briefly extended to online gaming and other digital transactions, amplifying fears of fresh policy headwinds for a sector already scarred by years of regulatory tightening. Following a decline in tech stocks, officials Tuesday dismissed the speculations of a levy on the gaming industry.

“The sell-off in recent days is driven by concerns over possible VAT tax increase on internet services, online gaming and other online transactions. This follows the recent VAT increase on certain telecom services,” said Qi Wang, investment strategist at UOB Kay Hian.

The pullback in China’s tech stocks has also coincided with broader volatility in global technology markets, driven by fears around artificial intelligence-driven disruption to software companies.

“To me it’s a barrage of negative news globally,” said Phelix Lee, senior equity analyst at Morningstar.

“We have Anthropic reportedly rolling out an AI plugin that automates bits of legal work, sparking fears in legaltech firms and fueling the broader software sell down; then we have VAT hike rumors on Chinese internet firms and risk-off sentiment builds in the hardware AI trade as there are reports of rupture between Nvidia and OpenAI”

Despite the sharp drawdown, some investors see the sell-off as a corrective move rather than the start of a deeper downturn. Looking at the broader Hong Kong and China equity markets, the recent weakness appears concentrated in pockets that had previously outperformed, according to Morningstar. 

“I regard the action as a healthy pullback and it’s largely concentrated in sectors that have probably overshot fair values,” said Lorraine Tan, director of equity research for Asia at the firm.

Other asset managers say the fundamental outlook for Chinese tech has not materially deteriorated, even as near-term positive triggers lack visibility. “Catalysts have been somewhat lacking for the sector,” said Vey-Sern Ling, managing director at Union Bancaire Privée.

“Recently, there’s also been regulatory noise in travel and e-commerce, which we think are specific rather than systemic, as well as some worries about value-added tax,” Ling said.

“Fundamentally nothing has changed to derail our positive outlook [for Chinese tech stocks]. Valuations continue to be supportive, sector earnings have potential to rebound, and AI may provide a stream of catalysts ahead.”