Worst hit was Lolliman Holdings - regarded as a highly speculative stock by brokers - which plunged 35 per cent.

Tung Wing ''rights'' shares were down 29 per cent, Chee Shing Holdings saw a 25 per cent drop and Kader Investment and Santai Manufacturing fell 23 per cent and 21 per cent respectively.

The casualty list included every red chip on the Hongkong market.

Lolliman, the target of a successful takeover by Continental Mariner late last month, was an extreme case. Its price movement showed the volatility and speculative element of the red chips. The price rose from 60 cents before the takeover to $2.50 at itsheight with huge fluctuations every day.

The stock fell 34.7 per cent to end 60 cents down at $1.13.

Brokers said buying interest in red chips disappeared suddenly largely due to rumours of fund repatriation to China.

Proposed austerity measures by the Chinese Government sent speculators into a sheep-like panic, even though brokers said there was no real reason for a run on the stocks.

Steven So, research manager of Jardine Fleming Securities, said rights issues would have a dilutive effect on the stocks, but it should be neutral rather than negative.

''The slump, in the final analysis, is speculation,'' Mr So said.

However, pessimism about China, has clouded not just the red chips but the market as a whole - with decline continuing to dog the market.

The Hang Seng Index hit a high of 7,528 during June, retreating to 7,100 at the end of the month. Local and overseas investors are reluctant to put more money into the market, because of the high price-earnings ratios. Earnings growth forecasts are modest in real terms, after inflation has been taken into account.

Brokerage Smith New Court suggested: ''Given that the move upwards had not been smooth, the lapse looked to many like just another mini-correction. The question is whether to bet on it.'' Sassoon Securities forecasts the index will hit 8,000 by year-end. However, there are several concerns which will make investors hesitate.

The bilateral talks over the political development in Hongkong still holds the key to the short-term direction of the stock market, while the medium-term direction depends on China's economic policies.

Hongkong has overcome competitiveness problems posed by the high inflation rate by relocating its manufacturing base to the mainland.

So far, the yuan depreciation has given unexpectedly strong support to the Hongkong market because Chinese capital has fled to Hongkong property and stocks.

However, as China adopts a more restrictive monetary policy, the flow of investment funds into Hongkong will be tightly controlled and there could be a reversal of this flow.

Economists believe that action by the mainland authorities to stabilise the Chinese economy is inevitable. But will the squeeze bring repatriation of capital? On June 25, a rush of hot money out of the territory pushed the Hongkong dollar to a low of 7.78 against the US dollar, a level not seen for the past 18 months.

Although chief executive of the Hongkong monetary authority Joseph Yam Chi-kwong did not confirm whether this was the result of fund repatriation by China firms, economists believe it was.

Hongkong is a net borrower of funds from banks in China. There was evidence that China cut back its position as a net lender in the interbank market from $56 billion in mid-1992 to $39 billion in the first quarter of this year.

This could be indicative of the acute shortage of foreign exchange that prompted the devaluation of the yuan.

Economists believe that if China continues to drain funds from the Hongkong dollar interbank market this could make an impact on liquidity, which will manifest itself in firmer interbank money rates.

But Mr Yam said dialogue relating to the flow of funds from China would be held between the Hongkong Monetary Authority and the People's Bank of China, in order to maintain the stability of the Hongkong financial market.

On the stock market, fears of repatriation of China funds and cash calls have hit the red chips.

Brokers expect China firms to hold off investing further capital in inactive ''shell'' companies in the second half of this year as investors become more cautious about buying red chips.

Brokers are also worried that the recent cash calls from the ''shell companies'' may squeeze liquidity in the market as a whole.

It is widely expected that the cash calls will persist in the second half of the year and early next year.

''The concern does not lie in the size of the funds raised, but how the proceeds are used,'' said Alex Tang, head of Dao Heng Securities research.

Many companies raising funds have not stated clearly how the money is to be spent. Investors fear that they will go into speculative property ventures.

The property sector is expected to be the hardest hit by a central government clampdown.

MR TANG said the injection of assets from the mainland was originally nothing bad, but the valuation of these assets was the major problem.

Investors had looked forward to having cheap and good quality assets injected into the shell companies to justify the high price-earnings ratios.

Monday's sell-off seemed to be sparked by a realisation that this might not be the case.

About $40 billion was raised in the first half of this year, of which around $13.71 billion was raised by the ''red chips''.

Further calls on equity are likely to be heavy. It is expected that cash raising is likely to be around $60 billion in the second half of the year.

The major cash calls include Henderson Land spinning off its China operations, Hopewell splitting its power-generation units and further flotation of state-owned enterprises.

''We originally estimated $80 billion could be absorbed by the market for the whole year,'' Mr Tang said, adding it was now likely to be $20 billion more.

Mr Tang said raising the extra money would not be a problem if overseas institutions backed it.

The $100 billion question is, will they?