China traders, insiders and foreigners are all fleeing stocks

[NEW YORK] Sentiment in China's equity market worsened amid the biggest threat to diplomatic ties with Washington in years.

The CSI 300 Index fell 3.6 per cent to head for the lowest in a week after the Chinese foreign ministry said it ordered the US to close its consulate in the south-western city of Chengdu. The ChiNext Index lost 4.7 per cent, and the yuan touched its weakest in two weeks. China's defence stocks rose.

The Trump administration abruptly had earlier ordered the closure of a Chinese consulate in Houston. The escalation in tensions comes at a particularly volatile time for China's stocks, with the government taking steps to manage a debt-fuelled frenzy that had pushed equities to their highest since 2015. While bullish traders have pushed leverage to an almost five-year high, insiders at the nation's tech startups announced plans to sell as soon as they could.

"Worries over China-US relations will dominate the market," said Raymond Chen, a portfolio manager with Keywise Capital Management (HK). "People will be closely watching how the US reacts to the closure of Chengdu consulate. I expect more panic selloffs in the near term."

The consulate closures came after US President Donald Trump said on Thursday the trade accord with China means "much less to me" because of what he called China's role in the spread of the coronavirus. Earlier, Chinese foreign ministry spokesperson Wang Wenbin warned the US to think "carefully" about where the relationship was heading in response to a question about the future of the deal.

China's yuan fell as much as 0.28 per cent to 7.0235 versus the greenback, the weakest since July 8. China's government bonds extended gains, with futures contracts on 10-year notes climbing as much as 0.32 per cent to the highest since July 3. The yield on debt due in a decade dropped two basis points to 2.89 per cent.

AviChina Industry & Technology, which makes aviation products for the military, surged as much as 10 per cent in Hong Kong. Avic Shenyang Aircraft jumped as much as 9.7 per cent to a record in Shanghai.

BLOOMBERG