China’s main stock market index, the Hang Seng Index (HSI), fell by 2% on Monday as the market extended losses amid fears of an increasing economic confrontation between the United States and China. The development comes after the US military shot down a Chinese balloon, allegedly spying on key military sites across the country.

US Shoots Down Chinese Balloon

On Saturday, the US military shot down a suspected Chinese spy balloon after it drifted off the East Coast near the Carolinas. Defense officials announced they were tracking it on Thursday when it entered US airspace and triggered a public spying saga.

According to a Reuters report, President Joe Biden issued an order on Wednesday to take down the balloon. However, the Pentagon suggested waiting until it could be done over open water to safeguard civilians from debris falling from thousands of feet above commercial air traffic.

While multiple aircraft were involved in the mission, an F-22 jet fighter fired a single shot at the ballon and sent it down about six nautical miles off the US coast at 14:39 EST, a senior U.S. military official has reportedly said.

China has expressed dissatisfaction with the decision, describing the shooting down of the balloon as an overreaction. The country’s Vice Foreign Minister Xie Feng filed a formal complaint to the U.S. Embassy in Beijing on Sunday, the Wall Street Journal reported. The statement claimed the ballon was an unmanned civilian aircraft that had drifted off course.

“The U.S. side obviously overreacted and seriously violated the spirit of international law and international conventions,” Feng said in the statement. He also blamed Washington for damaging efforts to stabilize relations between the two countries.

Chinese Stock Plunge Amid Rising Tensions

On Monday, Chinese stocks extended losses amid growing speculations that the ballon incident could lead to economic retaliation by the Biden administration.

The Hang Seng Index (HSI), a free float-adjusted market capitalization-weighted stock market index that is the leading indicator of the market performance in Hong Kong, lost 2.7% on Monday. Similarly, the CSI 300 Index, a free-float weighted index that consists of 300 A-share stocks listed on the Shanghai Stock Exchanges, slumped 1.3%, marking its worst day since December 20.

The developments are an indication of the geopolitical risks of investing in China. The country’s most-recent confrontation with the US could further accelerate the market’s downshift as both sides might consider imposing bans on various products. Iris Pang, chief economist for Greater China at ING Groep NV, wrote in a note:

“Both sides will likely impose more export bans on technology in different industries. This is a new threat to supply chain disruption, although the risk of logistical disruption from Covid restrictions has now disappeared.”

Notably, Chinese stocks were on the verge of a bull market last week as the country ended its three-year-long zero-Covid policy. However, investors will now keep a keen eye on how the bilateral tension unfolds to assess whether Chinese stocks can resume their uptrend.

Willer Chen, senior research analyst Forsyth Barr Asia, said the recent developments “should be a big surprise to investors given the market’s previous expectation was that the Sino-US relationship could improve after the now called-off Blinken visit.” US Secretary of State Antony Blinken is expected to postpone his trip to Beijing due to the recent incident.

In the currency market, China’s yuan firmed on Monday after touching a four-week low. The US Dollar has gained +0.0723% against the yuan, with 1 USD currently trading for 6.7777 Chinese yuan.

This article originally appeared on The Tokenist

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