As the Hang Seng Index plunged yesterday, red chips collapsed further on the fall of Peregrine Investments Holdings and fears of a devaluation of the yuan. The red-chip index plummeted 21.91 per cent to 964.5 points, bringing its losses this year to a staggering 44.75 per cent. Despite rumours that Peregrine was selling a substantial portfolio of red-chip stocks, restrictions placed on the failed investment bank by the Securities and Futures Commission meant no assets could be sold yesterday. Still, the prospects of a major sell-off by Peregrine was enough to unnerve investors. 'Peregrine has a huge China book and there are real fears that it will be forced to sell out to pay off its creditors - that would be a catastrophe,' a red-chip analyst at a European investment bank said. The bank accumulated much of its book by acting as arranger on several initial public offerings for companies such as China Merchants Holdings (International) Co, First Tractor Co, Beijing Enterprises Holdings and Shum Yip Investment. However, it is not clear how many shares remain in Peregrine's portfolio. ING Barings sales director James Osborn and some other analysts suggested the fall of Peregrine was 'an excuse rather than a reason' for red-chip losses. Peregrine-connected shares were hit harder than the rest of the sector. China Merchants fell sharply, closing down 26.86 per cent at $3.95, and First Tractor tumbled 22.23 per cent to close at $2.10. Beijing Enterprises dived 24.26 per cent to $10.15 and Shum Yip surrendered 26.92 per cent to settle at $1.48. Traders said there was growing concern that the yuan would have to be devalued, which - while making the country's exports more competitive - would spark a sell-off of mainland-related shares. 'We've always thought that a 5 per cent devaluation would be necessary to maintain competitiveness but with the crisis worsening, more could be necessary,' one trader said. He said the mainland needed to adjust itself to the 'new economic realities in Asia'. 'If devaluation doesn't occur due to political reasons, China will pay the price in other ways - through reduced wages and higher interest rates - which will slow the rate of economic growth,' he said. He said in the past investors seldom worried about the price-earnings ratios of red-chip companies. 'Now people are asking: 'Where are the earnings?'' he said. He said that red chips had often relied on growth by acquisition in the past but the current fund-raising climate was making this impossible.