A sharp and sudden sell-off in Chinese technology stocks drove a major index to the verge of a bear market, fueled by growing investor anxiety over potential new taxes on internet companies.

The Hang Seng Tech Index swung from an early gain to a steep 3.4% drop on Tuesday, briefly pushing its decline from an October peak to 20%. The index later recovered some ground, trimming its loss to 1%. Among the hardest hit were Kuaishou Technology, Tencent Holdings Ltd., and Alibaba Group Holding Ltd.

This abrupt downturn was triggered by mounting investor concern that the government could levy higher value-added taxes on internet firms, following a recent tax increase on telecommunications companies. The sell-off also mirrored recent volatility on Wall Street, where renewed doubts about the tech sector's lofty valuations and diminished expectations for US interest rate cuts have created headwinds.

Further dampening market sentiment was Tencent's move to distribute cash via digital red packets to attract users to its AI application, Yuanbao, echoing similar promotional tactics by its rivals. This has intensified worries about an already fierce price war among China's leading tech giants.

"The HSTECH index has been underperforming since December, and today's weak opening could be due to capital shifting to buy-on-dip opportunities in other sectors, combined with market jitters over potential tax reforms," commented Julia Wang, Chief Investment Officer for North Asia at Nomura International Wealth Management. "The index appears somewhat oversold relative to its fundamentals. We might actually witness a more substantial rebound as we approach Chinese tech earnings in mid-February and the key policy meetings in March."