Asia Stocks Falter Amid Growing Concerns Over China’s Economic Outlook and China-Japan Tensions

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FILE PHOTO: Printed Chinese and Japanese flags are seen in this illustration, July 21, 2022. REUTERS/Dado Ruvic/Illustration

Asian stock markets showed a lack of stability as investors remained on edge, awaiting crucial economic data that could influence the U.S. Federal Reserve’s interest rate decisions.

At the start of trading on Tuesday, Japan’s Nikkei index slipped 0.1% to 38,634.50, while China’s Shanghai Composite Index declined by 0.52% to 2,796.48. The Hang Seng Index in Hong Kong also fell by 0.51%, trading at 17,601.00.

The unease in the markets comes in the wake of strong spending figures released last Friday, which dampened expectations of a significant half-point rate cut by the Federal Reserve. Investors are now focused on the upcoming U.S. ISM manufacturing survey and the highly anticipated jobs data, which are expected to provide further insights into the Fed’s future actions on interest rates.

In addition to the broader economic concerns, investor anxiety about China’s economic situation continues to mount. Citigroup economists have noted that China’s economy is grappling with a “double whammy” of weather-related disruptions and weak demand. They expressed concerns that the country’s growth target of “around 5%” could be at risk. Despite the government’s efforts to boost the economy through increased bond issuance, there are doubts about the effectiveness of these measures in improving economic conditions before loosening debt management constraints.

On the corporate front, Sanergy Group experienced a dramatic 99% collapse in its stock value on Tuesday after Hong Kong’s Securities and Futures Commission advised investors to avoid trading the stock due to its high concentration in shareholding.

Adding to the market jitters, recent developments between China and Japan have heightened tensions. Bloomberg News reported that China is threatening severe economic repercussions if Japan imposes further restrictions on the sale and servicing of chipmaking equipment to Chinese firms. This escalating dispute complicates efforts led by the United States to limit China’s access to advanced technology and could have significant implications for the semiconductor industry.

High-level Chinese officials have made their stance known in meetings with Japanese counterparts. Toyota Motor Corp., a major player in Japan’s semiconductor strategy, has privately raised concerns about potential Chinese retaliation that could disrupt Japan’s access to critical minerals needed for car manufacturing. Toyota’s investment in a new chip campus by Taiwan Semiconductor Manufacturing Co. in Kumamoto underscores Japan’s strategic focus on the semiconductor sector.

Japan’s semiconductor equipment manufacturer, Tokyo Electron Ltd., could also be directly affected by new Japanese export controls. The U.S. has been actively encouraging Japan to impose further restrictions on companies like Tokyo Electron from selling advanced chipmaking tools to China, as part of a broader strategy to curb China’s advancements in the semiconductor sector. In response, U.S. and Japanese officials are working to secure a reliable supply of essential minerals such as gallium, germanium, and graphite, which are critical for various technologies.

As tensions rise and economic uncertainties persist, Asian markets remain cautious, with investors closely monitoring both regional developments and global economic indicators.

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