Hong Kong stocks fell 1.99 per cent yesterday on the back of Friday's falls on Wall Street and renewed concerns about rising interest rates. The Hang Seng Index closed down 342.95 points at 16,840.98. Fears of higher interest rates were rekindled on Friday after the US Government said the economy grew at a robust 5.2 per cent in the second quarter. The Nasdaq Composite Index slumped 4.66 per cent on the news and the Dow Jones Industrial Average was off 0.7 per cent. Higher interest rates in the US put pressure on Hong Kong banks to raise their lending rates through the SAR's linked exchange rate with the US dollar. China Mobile pulled the Hang Seng Index down 124 points as it fell 3.11 per cent to HK$62.25. Hutchison Whampoa lost 2.67 per cent to $109 and HSBC came off 0.96 per cent to $102.50 ahead of its interim results announcement. Brokers noted that most blue-chips fell, not just the more interest-rate sensitive stocks such as property and banks. 'The decline among the blue chips was widespread,' Fulbright Securities general manager Francis Lun said. Some brokers, however, argued that concern about higher US rates was overdone. A large component of the growth was due to investment spending which would increase capacity and cut inflationary risks. Despite the fall of the Hang Seng Index the market performed better than expected after the US growth data and sharp falls on Nasdaq. Turnover of $11.34 billion - down from last week's HK$15.03 billion average - showed investors were not panic-selling on the US figures. Investment funds were reshuffling their blue-chip portfolios ahead of changes in the constituents in the Hang Seng Index which take effect today. The two new entrants rose, with computer maker Legend Holdings up 2.32 per cent to $8.80 and trading firm Li & Fung rose 3.19 per cent to $38.80. Outgoing stocks fell, with property firm Great Eagle Holdings losing 4.63 per cent to $12.35 and hotel operator Shangri-La Asia shedding 5.11 per cent to $8.35. 'It was quite apparent that we saw some index fund reshuffling,' OSK Securities research manager Alex Wong said. Mainland-related stocks rallied yesterday as their earnings are less sensitive to rises in US interest rates - the H-share index gained 1.79 per cent and the red-chip index rose 0.63 per cent. Investors were also buying into some counters on industry reform stories. 'China stocks were very strong as people are still very bullish on the restructuring stories,' Mr Wong said. H-share China Southern Airlines jumped 10.52 per cent to $2.625 as the consolidation in the airline sector is expected to open up new opportunities for it. Chu Kong Shipping was the biggest red-chip gainer, jumping 13.04 per cent to 78 cents. Brokers expected the Hang Seng Index to rebound today on the back of a resurgent HSBC, which reported stronger than expected interim profit growth of 31 per cent. 'It is safe to predict that the Hang Seng Index will recover to the 17,000 level because HSBC results were above expectations,' Mr Lun said.