Hong Kong has invested a huge amount of faith in this bull market. Soaring prices always cause otherwise rational investors to suspend disbelief. This time is no different. Plenty have embraced the mantra that stocks, as if by imperial edict, will rally through the handover. This week has severely tested that conviction. Evidence of a Beijing clampdown on speculative excess triggered yesterday's 497-point market plunge. Like any correction, investors who climbed a wall of fear needed little reason to take profit. More interesting is whether mid-June will be remembered as the moment the great summer rally peaked? There can be little doubt that China money has driven the latest price surge, and will be critical in any comeback. Whether this fall proves nothing more than a blip on an otherwise rising curve, or, indeed, a fundamental turning point, the Hong Kong market will never again be quite the same. The reddening of locally listed firms is a permanent feature. That cannot be said for the flood of hot money - much of it from flotation proceeds - that has driven the boom. The crackdown on state enterprises using funds to punt other red-chip stocks has taken much of the liquidity out of the market at a stroke. By discipling Guangshen Railway for using proceeds for financial investment a warning was flashed to other mainland firms. China's version of zaitech financial engineering has seen many red-chip firms do little else but run Hong Kong share-dealing operations in recent months. One mainland company is said to have battled to jump the listing queue ahead of Beijing Enterprises. The reason was simply that it wanted to use its newly acquired war chest to stag the issue. With the liquidity tap turned off the illusion of value looks to have been exposed as ephemeral at best. Recent days have seen a host fund managers talk publicly about trimming their positions on the market. The latest was Merrill Lynch which downgraded its territory weighting. The bet must be that plenty are simply looking to rescue a modicum of face. Plenty still hold huge positions on the market. Through this realignment of expectations brokers continue to trumpet their usual refrain, attending any sell-off. Buying opportunities loom since China will support prices as a window dressing for the handover celebrations, runs the pitch. This was always nonsense. Far more important to mainland authorities is keeping control of the red-chip phenomena. They know that to retain credibility, allowing other firms to tap international funds, speculative excess must be tackled head on. For sure if the sell-off turned into a rout Beijing has telegraphed its intention to play white knight. That is very different from promising to support a runaway boom that will inevitably end in tears and criticism of its economic stewardship. Increasingly investors are looking at China stocks with a more critical eye. Plenty were content to ride the liquidity wave while it lasted, but are now looking at fundamentals. Profitability, management expertise and the quality of relationships with parent firms are suddenly coming under more detailed scrutiny. Added to the red-chip reality check are worries over the the new administration's plans for increasing the housing stock. Policy advisers to Chief Executive-designate Tung Chee-hwa are testing the waters over a range of plans, ultimately involving an increase in land supply. Developer stocks have been mauled this week with the worry that increased land supply will presage falling prices, low sales margins and ultimately poor profit growth. All of this despite a booming Wall Street and benign United States interest rate environment. Maybe that tells us that the correction is not before time. Clearly the good news from the US has acted to underpin sentiment against the travails from across the border. Imagine how much worse things could have been if Mr Greenspan had put his oar in.