Markets on edge as China warns against Pelosi visiting Taiwan

Hong Kong’s Hang Seng Index (HSI) slid as much as 3.2% in the morning, but pared losses to 2.4% at close. Mainland China’s Shanghai Composite Index (SHCOMP) ended down 2.3%. Taiwan’s Taiex closed 1.6% lower.

European markets also had a weak start on Tuesday. Germany’s DAX (DAX) and France’s CAC 40 (CAC40) dropped 0.5% and 0.4% respectively, while the FTSE 100 (UKX) in London inched down 0.1%.

Worries about escalating tensions in the Taiwan Strait are roiling markets.

Pelosi is expected to visit Taiwan as part of her tour of Asia, according to a senior Taiwanese government official and a US official, despite warnings from Biden administration officials, who are worried about China’s response to such a high-profile visit.

The stop — the first for a US House speaker in 25 years — is not on Pelosi’s public itinerary and comes at a time when US-China relations are already at a low point.

During a regular foreign ministry briefing Monday, China warned against the “egregious political impact” of Pelosi’s planned visit to the self-governing island that China claims as a part of its territory. Zhao Lijian, a spokesman for the foreign ministry, said that the country’s military “won’t sit by idly” if Beijing feels its “sovereignty and territorial integrity” is being threatened.

“Pelosi’s Taiwan visit is tainting sentiment today. And amid escalating tensions in Taiwan Strait and deepening worries about a global economic slowdown, investors are diving headlong into US bonds,” said Stephen Innes, managing partner at SPI Asset Management, on Tuesday.

“No party wants a real war, but the risk of mishap or even aggressive war game escalation is real, which could always lead to a tactical mistake,” he said.

ING analysts, meanwhile, expected that China could send warplanes near Taiwan or even over it “before, during and after” Pelosi’s possible visit.

“It seems that the US has underestimated or misread President Xi’s stance on Taiwan. The determination of Xi on uniting Taiwan with Mainland China is extremely firm, ” the analysts said in a research note on Tuesday.

“We should see weakness in the Chinese yuan and Taiwan dollar over the coming days,” they added.

CNN’s Eric Cheung, Kylie Atwood, Alex Rogers and Kevin Liptak contributed to this report.