The figurative fallout of the blown-up Chinese spy balloon descended on Hong Kong and mainland stocks on Monday, with worsening U.S.-China relations dealing a setback to a market rally.
Hong Kong's benchmark Hang Seng Index has had a stellar few months, rising by more than 50%. But it fell 2.0% on Monday, with the CSI 300 index of the largest listings in Shanghai and Shenzhen also down 1.3%.
Hong Kong is normally the site of the "fast money" moving into and out of Chinese shares. Unlike the mainland's walled-off markets, international investors can buy and sell as they please in Hong Kong.
They sold today, but have been buying of late. Having led the world in losses for two years, the Hang Seng shot up 54.4% from its nadir on October 31 through January 27. Geopolitical tensions have since seen it give back 6.4%.
Hong Kong and mainland Chinese stocks have run up in anticipation of China's opening back up after Beijing scrapped its zero-Covid policy. While that created a devastating outbreak of Covid-19, which has raced through the country, the expectation is that China's economy will now get back on track, particularly in the second half of this year.
The moves in mainland shares haven't been so dramatic because the selloff wasn't as severe. But the CSI 300 has followed the same pattern as the Hang Seng, bottoming on October 31 before rising 19.7% through the end of January. So far in February, it is down 2.7%.
U.S.-China relations have also seen some slight improvements, prior to the spy balloon incident. U.S. Secretary of State Antony Blinken was due to travel to Beijing, and was likely to meet with Chinese President Xi Jinping, but on Friday postponed that trip indefinitely. An F-22 Raptor jet on Saturday blew the Chinese balloon out of the sky with an AIM-9X Sidewinder missile over South Carolina's coast.
China says the unmanned balloon is "a civilian airship used for research, mainly meteorological, purposes." It claims Westerly winds blew it off its planned course. It also claims it has "no intention to violate and has never violated the territory or airspace of any sovereign country," even though Japan says five Chinese missiles landed in its waters while China conducted wargames surrounding free-governed Taiwan. What's more, China denies that Blinken and Xi were ever scheduled to meet.
The Pentagon says the balloon is part of a fleet of Chinese spy balloons that have been spotted over the Americas, East Asia, South Asia and Europe. But it's also not clear what the purpose of any brazen intrusion into U.S. airspace might be, since the balloon would have delivered little information that a Chinese spy satellite could not deliver.
The incident does undermine any progress stemming from the meeting between U.S. President Joe Biden and his Chinese counterpart Xi in Bali in November. There was optimism at the time that the thawing in atmosphere might reset the troubled U.S.-China relationship.
Biden is due to give his State of the Union speech on Tuesday, and is under pressure to respond forcefully to the balloon incident. Both the United States and Taiwan are also soon to enter election cycles, suggesting the prospects for rapprochement with China are slim.
One exception to today's selloff came in the form of artificial-intelligence developer SenseTime Group (HK:0020). The company, which is subject to U.S. sanctions, has entered into a letter of intent to supply two Saudi Arabian companies with its tech. SenseTime shares jumped 6.4%, its products still in strong demand among dictators and authoritarian states the world around.
The U.S. Treasury Department slapped SenseTime with sanctions on Human Rights Day in October 2021, assessing that its facial-recognition technology is used as part of China's military-industrial complex, in particular for surveillance of ethnic minorities including China's Uighur population.
Western countries continue to attempt to diversify production lines away from China. An unproven Australian company has just won approval to take over a failed British battery maker, promising to help build electric vehicles in Britain that are free of materials from both China and Russia.
Recharge Industries has been selected as the preferred bidder to take over Britishvolt, and take it off the hands of administrator EY. It beat three other bidders and will now work on its final offer package, pledging to revive plans to build a US$4.6 billion "gigafactory" in the north of England.
Recharge, which is also attempting to build a battery factory at Avalon Airport outside Melbourne, could end up making batteries using Australian minerals such as lithium, U.S. tech based on the battery developer C4V, and British as well as Aussie manufacturing, bringing the entire production cycle within that circle of Western allies.
While trade relations between the United States and China appear to have briefly shifted into reverse, they are back in forward motion between Australia and China. Tensions had first come to a head after the previous Australian administration demanded an independent investigation into the origins of Covid-19, leading to an unofficial ban by China on imports of seven types of Australian product.
Australia's trade minister, Don Farrell, confirmed on Monday that he will travel to Beijing to meet his counterpart Wang Wentao, ahead of a potential visit by Aussie Prime Minister Anthony Albanese later this year. It's the first time that trade ministers from the two countries will meet since pre-Covid times in 2019.