As trade negotiations between U.S. and Chinese officials commence this week, a host of saber-rattling actions have already stirred the pot, signaling pessimism about any major advancements in the ongoing feud.

Some Chinese tech company stocks have been reeling Tuesday after reports resurfaced about the potential for the U.S. to elect to restrict certain capital flows into China—notably from U.S. government pension funds.

In late morning trading action, American Depositary Shares (ADS) of several Chinese firms were deep in the red, including Alibaba Group (NYSE: BABA), which fell around 2.3%; JD.COM (Nasdaq: JD), which shed nearly 1.5%; Baidu (Nasdaq: BIDU), which had fallen over 1%; Tencent (OTC: TCEHY), which was off about 0.75%; and Weibo (Nasdaq: WB), which lost almost 1.75%.

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The Invesco China Technology ETF (NYSEARCA: CQQQ), which has among its top holdings Alibaba, Tencent, and Baidu, as well as Meituan Dianping (OTC: MPNGF) and 58.com (NYSE: WUBA) also lost over 1.4% intraday Tuesday.

Chinese tech companies have generally been facing pressure stemming from U.S. trade representative Robert Lighthizer’s formal Section 301 investigation into China beginning in August 2017.

The probe was enacted to determine whether acts, policies, and practices of China’s government, were related to technology transfer, intellectual property, and innovation, may be found “unreasonable or discriminatory and burden or restrict U.S. commerce.”

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Against this backdrop, a harsh spotlight has been thrown onto Shenzhen-based telecoms equipment maker Huawei for U.S.-voiced concerns against its national security; and Chinese tech firms Baidu and Weibo have seen the value of their ADR’s more than halve from their latest 52-week lows.

With China reportedly accelerating its financial support for its “Made in China 2025” strategy, where emerging new technologies such as the Internet of Things (IoT), smart appliances and high-end consumer electronics have surfaced to the forefront of the country’s innovative approach to manufacturing, the U.S. has become increasingly wary of Chinese interests in its domestic tech arena.

Kenneth DeWoskin, a senior advisor to Deloitte’s Chinese Services Group, recently noted that over the past decade, a wide variety of export controls have evolved, along with an expanding list of barriers to the acquisition of some U.S. tech companies.

“A more and more commodious view of national security issues related to technology” – propelled by concerns about economic growth and competitiveness, safety and diplomacy – “could lead to an increase of the scope and powers of U.S. tech regulators,” he added.

Another Hit

In a separate blow to China’s technology sector, the U.S. Department of Commerce placed 28 Chinese entities on its ‘Entity List’ on the grounds of human rights violations in the nation’s Xinjiang Uighur Autonomous Region (XUAR). The blacklisting effectively bans these entities – comprised mostly of government and security bureaus, along with eight technology firms – from purchasing U.S. products or importing its technology.

The Commerce Department cited that “these entities have been implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass arbitrary detention, and high-technology surveillance against Uighurs, Kazakhs, and other members of Muslim minority groups in the XUAR.”

Hangzhou-headquartered Hikvision (SZSE: 002415), a major video security services provider, with a focus on big data and cloud computing is among the tech firms on the Commerce Department’s Entity List.

Others include Zhejiang Dahua Technology (SZSE: 002236), a provider of video surveillance products and services, which is part state-owned by Central Huijin Investment, a subsidiary of sovereign wealth fund China Investment Corporation; as well as voice recognition software company iFLYTEK (SZSE: 002230), which has been focusing on investments in artificial intelligence start-ups.

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Market participants may view the actions as a way for the U.S. to recapture its lead in the trade negotiations following reports that China had struck discussion points involving industrial policy reform and government subsidies from the agenda.

Many in the market had generally attributed some softening in U.S. economic data, as well as the ongoing impeachment inquiry against President Donald Trump, as support for strengthening China’s hand in this week’s talks.

The U.S.-imposed actions ahead of the high-level negotiations, which are set to include China’s Vice Premier Liu He and People’s Bank of China governor Yi Gang, may not portend well for an ultimate resolution to the trade skirmishes.

Adding to jitters, the negotiations also fall against the backdrop of a looming October 15 deadline, when the U.S. is set to increase tariffs on US$250bn worth of Chinese imports to 30% from 25%. 

Flight-to-Quality: Treasuries, Gold

Meanwhile, investors generally jumped into flight-to-quality mode Tuesday, with the yield on the 10-year U.S. government note having fallen 4 basis points intraday to around 1.51%. The level represents a drop of nearly 40bps since September 13, when China reportedly said it would exclude certain agricultural imports from its tariffs list, including soybeans and pork.

Gold was also up around 0.4% to US$1,510.35.

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Recent reports have surfaced about China’s fierce buying of gold, along with certain global central banks, amid escalating geopolitical uncertainties and dovish monetary policies.

However, Marc Chandler, chief market strategist at Bannockburn Global Forex, noted that most of the write-ups and comments about Chinese gold purchases “lack perspective.” According to Chandler, China’s gold holdings – valued at about US$93bn – are roughly 8% of the country’s U.S. Treasury holdings, which, as of July 2019, totaled around US$1.11tn.   

He continued that “China is trapped by its large reserve holdings,” and the gold market is “not big enough to absorb a significant part of these reserves or overall currency reserves” that stood near US$11.73tn at the end of the second half of 2019.

Chandler also cited reports from the World Gold Council, which noted that central banks bought more gold last year than in any year since 1971 when the last official link between the dollar and gold was severed. 

He added that many private investors also bought the precious commodity “not because a new global architecture will restore gold to its central place, but because the opportunity cost of holding it fell as some $15-$16 trillion European and Japanese bonds offered negative yield (of which as much as $1 trillion were corporate bonds).”

Meanwhile, shares of some exchange-traded funds such as the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) and the SPDR Gold Trust (NYSEARCA: GLD) have been soaring, amid intensifying geopolitical uncertainties, including the U.S.-China trade talks, Brexit and Hong Kong protests.

GLD and GDX have gained more than 31.1% and close to 71.5% from their respective 52-week lows, and were up 0.89% and 0.47% intraday Tuesday, according to the IBKR Trader Workstation.

Investors will likely continue watching U.S.-China trade talk developments unfold this week, with a close eye on further U.S. actions aimed at China’s tech sector, as volatility continues to shake financial markets.