* China stocks fall after Monday’s steep selloff * CSI300 -0.37%, HSI -1.03%; SSEC edges up 0.14% * Education shares continue slide on regulation worries * Delta variant behind cluster in city of Nanjing SHANGHAI, July 27 (Reuters) - Chinese blue-chips and Hong Kong’s benchmark share index fell to fresh lows for the year on Tuesday on persistent worries about the impact of tighter government regulation, while a surge in COVID-19 cases dealt a further blow to sentiment. At the midday break, China’s blue-chip CSI300 index was down 0.37%, extending Monday’s 3.2% selloff, with losses across the financial, consumer staples and real estate sectors. Hong Kong’s benchmark Hang Seng Index fell 1.03% after its 4.1% drop in the previous session, and the Hang Seng China Enterprises Index slipped 1.64%. Falls were wide-ranging, with the CSI financial sector sub-index down 1.36%, the consumer staples sector off 1.1%, the real estate index 2.95% lower and the healthcare sub-index down 0.92%. In Hong Kong, the IT sector fell 4.7% and the Hang Seng Tech index slumped 3.17%, hitting its lowest-ever level. The Shanghai Composite index was able to eke out a gain led by energy and materials firms, up 0.14% to 3,472.40 points. Monday’s shakeout was spurred by new rules reining in China’s $120 billion private tutoring sector, sending some shares crashing more than 45%, and new regulatory moves targeting technology and property. Education shares continued to slide, with New Oriental Education & Technology Group Co falling 2.63%, taking its drop over the last three sessions to near 70%, while the CSI education index slipped 2.22%. Anita Chu, an analyst at CCB International, said the unfavourable regulatory environment left little room for a business turnaround, and issued a downgrade and reduced target price for New Oriental. “If the final version of the policy comes to resemble its current form, we envision a worst-case scenario whereby existing listed-AST (after-school tutoring) operators will be compelled to spin-off their K9 AST operations from the listco, or else de-list by way of privatisation” “According to our estimates, the potential spin-off of K9 AST operations would take 60-70% off the earnings of New Oriental and 80-90% off (New York-listed) TAL Education.” In Hong Kong, heavily indebted developer China Evergrande Group extended its losses, spiralling 11.33% lower to new four-and-a-half year lows, after the company said it would cancel a special dividend proposal. The broader property sector in Hong Kong edged 0.32% higher after slumping on Monday, but real estate A-shares extended losses, falling 2.95%. Adding to broader concerns about the economic outlook, profit growth at China’s industrial firms slowed for a fourth straight month in June, as high raw material prices weighed on factories’ margins. A surge in highly contagious Delta variant COVID-19 cases centred on the eastern city of Nanjing also spurred concern on Tuesday. But Zhiwei Zhang, chief economist at Pinpoint Assetm Management said broader economic concerns were contained for now. “The market correction seems to reflect some investors’ concern about government’s policy stance on the capital market. We don’t think investors are concerned about the economy at this stage,” he said in an emailed comment. “Note that the equity market corrected but the FX market has been stable. This is different compared to, say, the episode of market turmoil in 2015, when stock market correction was accompanied by significant renminbi depreciation.” China’s yuan was quoted at 6.476 per U.S. dollar around midday on Tuesday, 0.1% firmer on the day. (Reporting by Andrew Galbraith; Additional reporting by Samuel Shen; editing by Richard Pullin) Our Standards: The Thomson Reuters Trust Principles.