Chinese markets stumbled on Friday after a powerful rally, with the blue-chip CSI300 Index dropping 2% its steepest fall in nearly five weeks. The Shanghai Composite lost 0.9% after briefly touching its highest level since 2015, while Hong Kong’s Hang Seng Index slid 1.7%, marking a five-day losing streak the longest since March.

Why It Matters:
The pullback signals renewed investor caution amid escalating Sino-U.S. tensions. Beijing’s expanded rare earth export controls and tighter checks on Nvidia’s AI chip imports have reignited fears of a tech and trade confrontation.

With both Washington and Beijing signaling harder positions ahead of a possible Trump–Xi summit, traders are cashing in profits after months of strong gains.

Market Reaction:
Tech, AI, and EV-related stocks bore the brunt of the sell-off. The CSI Semiconductor Index slumped 5%, the AI sector fell 4.8%, and EV shares dropped 6% after regulators revised tax-exemption rules. Rare earth shares also sank 2.9%, while battery makers CATL and CALB tumbled 6.8% and 9.7%, respectively.

Analyst View:
Citi analysts suggested both powers may be “strengthening their leverage” ahead of upcoming trade talks. Yintai Securities noted that China’s markets are shifting from “a liquidity-driven rally to a profit-taking phase,” with gains likely to stall in sideways consolidation.

What’s Next:
All eyes are now on Monday’s trade data, which could offer crucial clues about China’s export resilience amid tightening U.S. tech restrictions. A stronger reading may calm market nerves and revive risk appetite, while any signs of weakness could deepen the pullback and raise pressure for fresh stimulus from Beijing.
With Washington and Beijing inching toward a potential high-stakes Trump–Xi meeting, traders expect further policy signaling in the weeks ahead particularly on technology, trade, and currency stability. Until then, volatility is likely to remain elevated, with investors treading carefully between geopolitical crossfire and fragile market optimism.

With information from Reuters.