Market sentiment remains subdued as the Sino-Japan diplomatic crisis deepens, adding to economic worries with no policy easing in sight.

Hong Kong benchmark Hang Seng dropped 0.5% by the midday break, on track for a four-day losing streak.

In mainland China, the blue-chip CSI300 Index climbed 0.2%, while the Shanghai Composite Index barely moved.

Market participants lost risk appetite as US stocks fell for a fourth day amid valuation worries and doubts over an interest rate cut next month.

The mood is further soured by deteriorating relations between Beijing and Tokyo over Japanese Prime Minister Sanae Takaichi’s comments on Taiwan.

Japan has warned its citizens in China to step up safety precautions as a Tuesday meeting between Chinese and Japanese officials to de-escalate tensions offered few signs of a breakthrough.

Meanwhile, the US confirmed the sale to Taiwan of an advanced air defence missile system, in the second such weapons package for Taipei in a week.

Escalating geopolitical tensions could add fresh pressure to China’s struggling economy.

“After six months of improving sentiment, China’s growth outlook took a sharp turn in November,” BofA Securities said in its latest Asia fund manager survey, where 29% of respondents now expect a weaker economy.

“Despite this, investors foresee limited policy easing,” BofA Securities said.

Tech shares led the decline in Hong Kong. Xiaomi plunged 4% after the company warned of further hikes in smartphone prices next year due to soaring memory chip costs.

Chinese search engine Baidu lost nearly 1% after reporting a 7% fall in quarterly revenue.

In China, strength in energy and financial shares offset losses in real estate and media plays.