BUSINESS leaders yesterday said the stock market had over-reacted to fears of a China-United States trade war and remain cautiously optimistic about a negotiated settlement. The Hang Seng Index's fall of nearly 346.9 points, or 4.24 per cent to 7,844.14, on the year's first day of trading was widely blamed on the threats being exchanged between the territory's two biggest trading partners over copyright violations. But fund management groups said the market's reaction to the dispute was a 'smokescreen' for more fundamental problems that dogged the index last year. Market nervousness about a rise in interest rates and the prospects for the property market and mainland economy are triggering strong reactions as the market struggles to find direction. Michael Yuen, director of funds marketing for GT Management, said: 'The relationship between the US and China is not the issue affecting the stock market. 'The issue is whether interest rates have peaked; the overheating of the Chinese economy and Hong Kong real estate prices. 'Because of the nervousness anything that happens around the world can cause a fall. 'The fundamentals are weak so any more negative news will shake it more. 'The market will not go anywhere until these issues are clarified.' Business leaders were generally confident that American and Chinese officials would be able to avert an all-out trade war that could cost Hong Kong billions of dollars. Ian Christie, director of the Hong Kong General Chamber of Commerce, said: 'The last thing we want is a trade war between China and the United States because inevitably Hong Kong would become the meat in the sandwich. 'There's a certain amount of posturing and of course we are concerned, but we have not reached the alarmed state.' Michael Michelson, vice-chairman of the American Chamber of Commerce, added: 'It's a little too early to worry. It's still in the negotiating stage.' Raymond Ch'ien, chairman of the Federation of Hong Kong Industries, believed a last-minute solution would be found. He said: 'I think both sides are only using harsher rhetoric and are just getting emotional. 'They should be able to resolve differences when they become rational. It should not take them long to realise that in a full-fledged trade war, both would be victims.' On Saturday, Washington placed US$2.8 billion of Chinese goods on a tentative list for punitive tariffs under special 301 legislation in retaliation for Beijing's failure to clamp down on copyright infringement against American audio-visual and software products. It is seeking the closure of 26 factories which have been producing illegal copies of US compact and laser discs and demanding greater access to Chinese markets for the original products. China fired back within hours with a string of retaliatory measures. Peter Everington, managing director of Regent Fund Management, believed that Hong Kong was in the grip of its worst bear market in a decade and that the trade dispute would accelerate the slide to 4,000 points. 'The short-term sell-off will continue and there will be no Chinese New Year rally,' said Mr Everington. 'I am talking about a bear market, not a correction. The most strategic view is down, down, down.' Mark Konyn, a director of Indosuez Asset Management, said the trade issue was creating uncertainty but that volumes were low and there was no clear direction. 'We are not taking it too seriously. But if it develops into a trade war, then it will be a real issue.'