Asia stocks fall as China warns against Pelosi visit to Taiwan

Stocks fell and US government bond prices rose as US House Speaker Nancy Pelosi’s expected visit to Taiwan raised the prospect of a forceful response from China’s military.

Hong Kong’s benchmark Hang Seng index fell as much as 3.2 per cent on Tuesday, later trimming some of its losses. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2.8 per cent. Both Taiwan’s Taiex and Japan’s Topix shed nearly 2 per cent.

In Europe, the regional Stoxx 600 share index slipped 0.4 per cent lower in early dealings on Tuesday. London’s FTSE 100 dipped 0.1 per cent.

Concerns over a potential crisis in the Taiwan Strait also spurred a rally in haven assets, with the yield on the 10-year US Treasury bond dropping 0.05 percentage points to 2.55 per cent, near a four-month low.

Japan’s yen climbed as much as 0.9 per cent to ¥130.39 against the dollar, its highest level in two months, as lower US bond yields dragged the US currency down.

The sell-off for shares across Asia came as Pelosi prepared to meet Tsai Ing-wen, Taiwan’s president, on Wednesday in what would mark the most senior visit by a US lawmaker to the country in 25 years, despite increasingly strident objections from Beijing.

“There is speculation, among other things, that the Chinese may make a military mark and/or impose some form of economic sanctions,” Seyran Naib, a strategist at SEB, commented in a note to clients.

Brent crude, the oil benchmark, briefly slipped below $100 a barrel on Tuesday morning, having not closed below this point since mid-July.

Thin summer trading conditions were also exacerbating market moves, analysts said.

“It’s a month of low liquidity and if something big happens it can be multiplied in such thin trading,” Deutsche Bank strategist Jim Reid said in a note to clients.

China’s foreign ministry spokesperson Zhao Lijian this week warned that “the Chinese People’s Liberation Army will not sit back” if Pelosi proceeds with the visit.

China conducted live-fire drills on an island in the Taiwan Strait on Monday, with the China Maritime Safety Administration promising more exercises from Tuesday through to Saturday.

John Kirby, US National Security Council communications head, said China “appears to be positioning itself to potentially take further steps in the coming days”, including “military provocations, such as firing missiles in the Taiwan Strait”.

Although Pelosi did not include Taiwan on her official itinerary for a wider visit to Asia this week over security concerns, three people familiar with the situation told the Financial Times that the Speaker would meet Tsai in Taipei tomorrow.

Traders said there was little immediate concern that China would take any action that would commit it to an invasion of the self-governing island, but the timing of the visit, ahead of the Chinese Communist party’s 20th Congress this year, made a stronger response from Beijing all but inevitable.

“The sell-off reflects concerns over a potential conflict,” said Louis Tse, managing director at Wealthy Securities in Hong Kong.

Tse said Chinese president Xi Jinping, who hopes to secure an unprecedented third term at the upcoming party congress, is under pressure to prevent Pelosi’s visit to Taiwan, over which Beijing claims sovereignty.

“And if Pelosi visits Taiwan and spurs a strong response from the Chinese military, it could trigger more selling,” he added.

Stock futures suggested that concerns over a potential geopolitical crisis in Asia were not weighing as heavily on shares elsewhere, however, with the S&P 500 tipped to shed only 0.5 per cent.

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