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Spy balloon drama drags down Chinese stocks as U.S.-China tensions reach 'escalatory phase'

U.S.-listed Chinese stocks dipped on Monday as tensions between the U.S. and China have grown in recent days over a suspected spy balloon that was shot down over the weekend.

The NASDAQ Golden Dragon China Index (^HXC), which tracks Chinese firms listed in the U.S, fell as much as 2.3% Monday, while the benchmark Hong Kong’s Hang Seng Index (^HSI) fell over 2%.

Some analysts believe a lack of dialogue between the world’s two largest countries could lead down a dangerous new road.

“There are bigger issues in play where the U.S. is drawing the line on, for example, outbound investment restrictions,” China Corporate Advisory Director Reva Goujon told Yahoo Finance Live on Monday (video above).

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Some market experts, however, see rising tensions potentially working to "draw investors toward the safety of the U.S. dollar."

"This trend could exacerbate if tensions flare up," Daniel Takieddine, CEO of BDSwiss MENA, wrote to Yahoo Finance in a statement. "The U.S. and China have already been at odds during the last few months while the U.S. tried to limit China’s access to cutting-edge chip technology."

The dollar index added nearly 0.8% on Monday to trade near $103.67.

On Saturday, U.S. armed forces shot down the balloon off the coast of the Carolinas, a move that followed Secretary of State Antony Blinken’s visit to Beijing being abruptly canceled last week. Chinese officials have claimed that the balloon was used for weather research.

MYRTLE BEACH, USA - FEBRUARY 05: Ships scan the sea during efforts to retrieve and recover the Chinese spy balloon after Chinese spy balloon was shot down in Myrtle Beach SC, United States on February 05, 2023. (Photo by Peter Zay/Anadolu Agency via Getty Images)
Ships scan the sea during efforts to retrieve and recover the Chinese spy balloon after Chinese spy balloon was shot down in Myrtle Beach SC, United States on February 05, 2023. (Photo by Peter Zay/Anadolu Agency via Getty Images) (Anadolu Agency via Getty Images)

“Each side will spin its own story around this, get what it can out of the moment and then move on,” Goujon added. However, China will likely have a “strong desire” to get Blinken’s visit back on track.

“In reality, though, these high-level interactions are about managing escalation in the competition, which is critical because you don't want it to go off the rails, you don't want to turn this into kinetic conflict. But we certainly are in an escalatory phase,” Goujon said.

On Tuesday, the House Financial Services Committee will hold a hearing on “Combatting the Economic Threat from China," in the wake of a political and diplomatic fallout.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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