China-Hong Kong Markets React to Diplomatic Tensions

China and Hong Kong markets fell amid tensions between Beijing and Tokyo. Japan's comments on Taiwan stirred diplomatic tensions, affecting investor confidence. Meanwhile, Chinese software and tourism stocks tumbled, while domestic AI firms saw an uptick. Observers see 2026 as a stabilizing year for China’s indices.

China and Hong Kong equity markets experienced declines as diplomatic frictions between Beijing and Tokyo intensified over the weekend. Investors, acting cautiously in light of these tensions, sought to consolidate gains following recent market rallies.

China's blue-chip CSI300 Index decreased by 0.7%, with the Shanghai Composite Index dropping 0.5%. The Hang Seng index in Hong Kong also slipped by 0.7%. To date, the Hang Seng index has risen by 30% this year, while the CSI300 has grown by 17%.

The diplomatic spat was instigated after Japan's Prime Minister Sanae Takaichi suggested in parliament that a potential Chinese attack on Taiwan could threaten Japan's security, prompting possible military responses. Amidst this, stocks of Chinese companies with Japanese market ties took a hit, further contributing to the market's decline.

(With inputs from agencies.)