China-U.S. Dispute Over Consulate Puts Market Watchers on Edge

The latest tensions between China and the U.S. have put investors on edge and caused concern that a possible worsening of ties will dampen enthusiasm for riskier assets, market watchers say.

News that Washington had ordered China to close a consulate sent equities in Hong Kong sliding, with the Hang Seng China Enterprises Index falling 1.9% at the close, snapping a three-day climb. The yuan also fell, erasing an earlier gain, and government bonds advanced.

The sudden drop Wednesday is a reminder of the way that markets can suddenly tumble on a renewal of tensions between the world’s two biggest economies, a rivalry that already encompasses issues from technology to trade. Investors are now waiting to see how China responds to the U.S. demand to shutter the facility in Houston.

Here’s what market watchers had to say about today’s slide:

Nathan Chow, senior economist at DBS Bank Ltd. Hong Kong Branch

This marks an escalation in the political aspect of the confrontation between China and the U.S. Investors will want to avoid risks in the near term, pressuring risk assets such as the yuan and stocks. However, I don’t expect the negative impacts of this incident to last for a long time, unless Beijing announces major retaliation measures. Considering we will see more similar cases of confrontation, I expect the yuan to end the year a level weaker than 7 per dollar.

Michael Every, head of Asia financial markets research at Rabobank in Hong Kong

This is only the latest escalation in a series that will end up in a crash for relations, for Hong Kong and for the yuan unless something changes. The markets will worry for all of five minutes and then resume rallying — right up until they realize the China-U.S. dynamic blows everything up eventually. I’m massively bearish in the long term. So enjoy the ride and don’t believe in it for a moment.

Kenny Wen, a strategist at Everbright Sun Hung Kai Co.

People got scared about the U.S. consulate closure. It’s normal to be scared, because there were very little information about this and it’s a very big downside surprise. Investors are worried that this is another sign that the relationship between U.S. and China has worsened. And since there is little information about it, people tend to use this as an excuse to lock in profit.

Banny Lam, head of research at CEB International Investment Corp.

While everyone is well aware of the poor Sino-U.S. relations, nobody wants to see further escalation. Investors are worried the consulate closure could lead to a string of actions. All eyes will be on how both sides react later today.