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China, Hong Kong stocks fall as western sanctions weigh

* Chinese and Hong Kong stocks fall more than 1%

* Western sanctions over human rights abuses hit risk appetite

* Concerns about policy tightening at home continue to weigh

SHANGHAI, March 23 (Reuters) - China and Hong Kong stocks retreated on Tuesday, as western sanctions against China dampened risk appetite, while lingering worries over policy tightening continued to weigh on the market.

The CSI300 index fell 1.4% to 4,984.50 points at the end of the morning session, while the Shanghai Composite Index lost 1.2% to 3,402.56 points.

The Hang Seng index dropped 1.2% to 28,545.71 points, while the Hong Kong China Enterprises Index fell 1.6% to 11,129.73 points.

The United States, the European Union, Britain and Canada imposed sanctions on Chinese officials on Monday for human rights abuses in Xinjiang, and Beijing hit back immediately with broad punitive measures against the EU.

“The sanctions hurt risk appetite, in particular among foreign investors, who sold shares via the Stock Connect,” said Jin Jing, an analyst with Caitong Securities.

“Persistent worries of policy tightening at home also continued to weigh on high flying sectors and stocks with lofty valuations as investors turned cautious,” he said.

China’s monetary policy needs to focus on supporting economic growth in a targeted way while also reducing financial risks, the central bank head said on Saturday.

By midday, foreign investors had sold a net 5.1 billion yuan ($783.43 million) worth of A-shares via the Stock Connect linking mainland and Hong Kong, according to Refinitiv data.

Leading the declines on the mainland, the CSI300 materials index and the CSI300 new energy index slumped 4% and 3.4%, respectively.

In Hong Kong, the Hang Seng consumer discretionary index and the Hang Seng materials index dropped 3.7% and 5%, respectively.

China’s blue-chip index has lost nearly 16% from an all-time high hit on Feb. 18, led by consumer, healthcare and new energy firms, as investors worry Beijing’s conservative economic growth target for this year could give it more room to rein in bubbles in its financial markets.

Analysts also said pressure was mounting for mutual funds to sell stocks to deal with increasing redemptions, as a correction continued in the stock market.

Enthusiasm about mutual funds has decreased after the Lunar New Year holiday, while there is evident redemption pressure for funds that heavily invest in consumer and health care stocks, CITIC Securities said in a report, noting issuance of new mutual funds remained sluggish in March.

Further hitting investor sentiment, the shares of Chinese e-cigarette makers slumped as Beijing planned to tighten regulations, with Smoore International Holdings Ltd tumbling as much as 39.3%. ($1 = 6.5098 Chinese yuan) (Reporting by Luoyan Liu and Andrew Galbraith; Editing by Ana Nicolaci da Costa)

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