Beijing has ordered the closure of the US consulate in Chengdu in retaliation for Washington's end of its Houston mission, the fear of a new Cold War, and the global stock markets.
China's benchmark CSI 300 closed 4.4 percent after the announcement, and the London FTSE 100 lost 1.2 percent as tensions between superpowers rose to the most dangerous level in decades.
Beijing informed the US Embassy on Friday that it had revoked the Chengdu consulate's operating license. The decision was "a legitimate and necessary response to the unreasonable acts of the United States".
Analysts warned that tensions between the world's most powerful countries after clashes over the coronavirus pandemic, trade, and action against Hong Kong's autonomy had increased dramatically.
China didn't provide a schedule for Chengdu's closure, but Hu Xijin of the Global Times state-owned newspaper said the US had 72 hours. Mr. Hu said Wednesday that China has 72 hours to close its Houston consulate.
Shi Yinhong, an adviser to the Chinese cabinet, said: “The US government has basically declared a new Cold War.
The State Department said the Chengdu closure was "in accordance with international law."
"China does not want to see the current situation between China and the United States, and responsibility rests solely with the United States," said State Department spokesman Wang Wenbin.
"We again urge the United States to immediately lift the erroneous decision to create the conditions necessary for bilateral relations to return to normal," said Wang.
He added that some Chengdu Mission personnel have "carried out activities that do not match their status" and "interfering in China's domestic affairs."
Beijing said it has made numerous diplomatic protests against its activities against the United States.
The Euro Stoxx 600 Index lost 1.4 percent, and futures markets gave the S&P 500 a 0.1 percent decline when US trading started later.
In foreign exchange markets, China's onshore renminbi exchange rate fell 0.2 percent against the dollar to Rmb7.0184. The Japanese yen, which serves as an investor's paradise in times of geopolitical uncertainty, rose 0.5 percent to 106.33 yen per dollar, the highest level in eight weeks.
"The unfortunate thing is that the market is now probably digesting, which is more of a start than a one-off," said Andy Maynard, a trader at China Renaissance. He added that the timing of the reaction compounded the losses as investors sold so as not to be affected by further retaliation measures expected over the weekend.
Shi Yinhong, an adviser to the Chinese cabinet, said, "The US government has basically declared a new Cold War."
Cheng Xiaohe, deputy director of the Center for International Strategic Studies at Renmin University in China, said: “You have to take revenge on diplomatic retaliation, which is roughly in the middle. If China had chosen Wuhan, an empty consulate, it would have looked weak. "
"But if China closes Hong Kong, Guangzhou or Shanghai, it's too serious," said Cheng. "Relationships have deteriorated completely," he added, saying what started as a trade war has grown into a diplomatic struggle and a technical conflict.
The U.S. Department of Justice said Thursday it recently charged four Chinese researchers with visa fraud for allegedly lying about their status as members of the People's Liberation Army. Three people were arrested and the FBI said the fourth was at the Chinese consulate in San Francisco.
Mr. Cheng said that it is possible that China will take revenge on the arrests.
"When military personnel go to the United States, they will often not say that they are in the military," he said, noting that the United States has tacitly allowed the situation to date. The people reportedly worked in military hospitals or other research institutions associated with the army. China has a huge system of military hospitals that also treat the general public.
The Chengdu consulate also briefly housed Chongqing police chief Wang Lijun, who sought asylum there in early 2012 when he betrayed the city's powerful party leader, Bo Xilai, an aspiring political star who was later detained.
After the closure, the United States will have four mainland consulates – in Guangzhou, Shanghai, Shenyang and Wuhan – and a consulate general in Hong Kong.
Additional reporting from Hudson Lockett in Hong Kong and Nian Liu in Beijing.