Chinese markets slump as tit-for-tat sanctions raise tension with US and Europe

Chinese stocks fell by as much as 3%on Tuesday as the United States and its allies announced new sanctions on Beijing, asign that its relationship with the West has hit another snag.

Hong Kong’s benchmark Hang Seng Index (HSI) was Asia’s worst performer, closing down 1.3%, after recovering slightly from a tumble of more than 3%earlier in the day. China’s Shanghai Composite (SHCOMP) index fell 0.9%. The rest of the region also struggled: South Korea’s Kospi and Japan’s Nikkei (N225) lost 1% and 0.6%, respectively.

“Investors’ nerves were rattled” by the sanctions, “muddying the geopolitical waters,” said Jeffrey Halley, senior market analyst for Asia Pacific at Oanda.

Washington announced sanctions Monday against two Chinese officials for “serious human rights abuses” against Uyghur Muslims and other ethnic minorities in Xinjiang. The European Union, Canada and the United Kingdom all imposed sanctions on the same individuals and others, a show of unity by the Western allies as they continued to voice condemnation over Beijing’s treatment of Uyghurs in the region.

TOPSHOT - A picture taken on March 26, 2019 shows the building of the European Parliament in Strasbourg, eastern France. (Photo by Frederick FLORIN / AFP) (Photo credit should read FREDERICK FLORIN/AFP via Getty Images)

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China denounced the moves and hit back against the European Union almost immediately, announcing its own sanctions against 10 EU politicians and four entities for “maliciously spreading lies and disinformation.”

Guy Verhofstadt, a senior member of the European parliament, even said that China’s decision to fire back had “killed” a major investment deal between Brussels and Beijing that has yet to be ratified. The deal, which has been in the works for years, is designedto rebalance trade with the world’s second largest economy.

Soon after the Chinese sanctions were announced, the second-largest grouping of lawmakers in the European Parliament said they would not engage in any talks on the agreement until the measures are lifted.

The flare-up comes after what was already a tense few days. Talks between the United States and China in Alaska led to a tense confrontation late last week during what was the first in-person meeting between senior leaders on both sides since US President Joe Biden took office.

News of the sanctions fueled a particularly rough day for tech stocks in Hong Kong. The Hang Seng Tech Index, which tracks 30 large tech firms including Alibaba (BABA) and Tencent (TCEHY), tumbled 2.6%. Alibaba (BABA) and Tencent (TCEHY) slipped 0.5% and 0.8% each. Meituan and Xiaomi lost 5.2% and 4.1%, respectively.

The market jitters also appeared to hurt Chinese internet giant Baidu, (BIDU) which launched a secondary listing in Hong Kong to a tepid response on its first day of trading Tuesday.

The $3.1 billion listing for the company, which already trades in New York, underwhelmed. It finished the day at 252.20 Hong Kong dollars ($32.47), less than 1% above its offering price of 252 Hong Kong dollars ($32.45). It was the city’s biggest secondary listing since JD.com (JD) raised $4 billion last June, according to data provider Refinitiv.

“Battle lines are getting drawn between [the] US and China around Internet technology dominance,” said Stephen Innes, chief global market strategist for Sydney-based online broker Axi. “You need to think last week’s less-than-amicable sitdown is probably holding some enthusiasm back as [the] US could continue to clamp down on Chinese technology.”