Most Asian stocks retreated on Tuesday as optimism over a deal to raise the U.S. debt ceiling was offset by fears of worsening ties between Beijing and Washington, amid renewed sparring between the two over trade and political sanctions. Chinese stocks were the worst performers for the day, with the Shanghai Shenzhen CSI 300 and Shanghai Composite indexes falling 0.8% and 0.7%, respectively. The blue-chip CSI 300 traded at a five-month low after China declined a request for a meeting between U.S. defense secretary Lloyd Austin and Chinese defense minister Li Shang Fu at a forum in Singapore later this week. The move comes as relations between the two countries stew at their worst level in decades, after the shooting down of an alleged Chinese spy balloon over U.S. airspace earlier this year. China recently blocked local sales of U.S. chipmaker Micron Technology Inc (NASDAQ:MU), an apparent response to strict curbs on semiconductor sales to certain Chinese entities placed by the U.S. and its allies earlier this year. Worsening ties between the two countries also come amid waning optimism over a Chinese economic recovery this year, with focus now chiefly on manufacturing and service sector activity readings for May, due on Wednesday. Chinese stocks have largely unwound all gains made on optimism over a post-COVID reopening, and are now trading negative for the year, following a string of weak readings for April.

Losses in Chinese stocks Spilled Over Into Hong Kong’s Hang Seng index.

which slid 0.8% to a six-month low. Broader Asian markets moved in a flat-to-low range as optimism over raising the U.S. debt ceiling ran out of steam. Even with lowered chances of a U.S. default, markets remained on edge over a potential recession in the country this year, which could greatly limit capital flows into regional markets. Australia’s ASX 200 index was flat, while Philippine shares led losses in Southeast Asia with a 0.7% drop. Some markets, such as Japan’s Nikkei 225 and the TOPIX, also saw a measure of profit taking after racing to 33-year highs on Monday. The two indexes fell 0.4% and 0.6%, respectively. Singapore-traded futures for India’s Nifty 50 index pointed to a flat open. South Korea’s KOSPI was the sole outlier, rising 0.8% in catch-up trade and as major chipmaking stocks, particularly SK Hynix Inc (KS:000660), benefited from a brighter outlook on demand, thanks to artificial intelligence development. Focus this week is also on more U.S. economic cues, particularly nonfarm payrolls data on Friday.