China vowed retaliation after the US forced the closure of its Houston consulate, prompting stocks to fall in one of the biggest blows to diplomatic ties between the two countries in decades.

The US government gave China three days to close its consulate in America’s fourth-most populous city in an unprecedented escalation, Chinese Foreign Ministry spokesman Wang Wenbin told a regular briefing in Beijing on Wednesday. China planned to react with firm countermeasures if the Trump administration didn’t revoke this erroneous decision, Wang said.

The US State Department subsequently confirmed in a statement that it had ordered the consulate closed to protect American intellectual property and Americans private information. It said international agreements required diplomats to respect the laws and regulations of the host nation and not interfere in its internal affairs.

The first signs of trouble came when Houston police and firefighters descended on the consulate following witness reports that papers were being burned outside in open containers, the Houston Chronicle and two local TV stations reported on Tuesday night, citing local police. In videos posted online by local media outlets, fires could be seen in multiple containers, with smoke rising into the sky.

Futures on the S&P 500 Index dropped with European stocks after China’s announcement, while Treasuries edged higher and the dollar erased a loss. The yuan weakened and Hong Kong shares deepened their decline. Gold and silver slipped from the session highs.

The US has clashed with China over everything from trade and 5G networks to territorial disputes and responsibility for the pandemic. On Tuesday, the Justice Department accused two Chinese hackers of working for Beijing to steal or try to steal terabytes of data, including coronavirus research, from Western companies in 11 nations.

This sort of incident has been very rare -- it often happens when the relations between two countries are really, really negative, Li Mingjiang, an associate professor with the Nanyang Technological University’s S. Rajaratnam School of International Studies. If China wants really to hit back hard, it could target the US consulate in Hong Kong.

While ties have suffered in recent years, the trend has been toward expanding ties since the two sides formally established relations more than four decades ago. The US and China have recently been bickering over Chinese demands to control the Covid-19 testing -- possibly gaining access to DNA samples -- of returning American diplomats who left the country in the early days of the coronavirus outbreak centered on Wuhan, several people familiar with the matter told Bloomberg News last month.

The dispute over testing and quarantining has been a contentious issue, according to a person familiar with the situation who asked not to be identified. China could respond to the American order by closing the US consulate in Wuhan, where the virus originated, or another city, the person said.

A State Department spokesperson, who declined to be named, said China had increased the scale of spying and influence operations over the past few years. That has included interference in domestic politics, stolen intellectual property, coercion of business leaders and threatening the families of Chinese Americans in China, the spokesperson said.

China accused the US of harassing diplomatic staff and intimidating Chinese students, confiscating personal electrical devices and detaining them without cause. Chinese diplomatic missions and personnel also recently received bomb and death threats, it added. In the statement, China said infiltration and interference is never in the genes and tradition of Chinas foreign policy, without referring to anything specific.

Beyond Imagination

China strongly condemns such an outrageous and unjustified move which will sabotage China-US relations, Wang said. “We urge the US to immediately withdraw its erroneous decision. Otherwise China will make legitimate and necessary reactions.”

The showdown comes against the backdrop of the US presidential election, in which both President Donald Trump and his presumptive opponent, former Vice President Joe Biden, have pledged to do more to challenge China. Wang Huiyao, an adviser to China’s cabinet and founder of the Center for China and Globalization, said the consulate closure was unthinkable, beyond imagination and questioned the US’s explanation for the action. “I don’t know where this is coming from,” Wang Huiyao said. If its just for simple IP, they can pinpoint who violated that and maybe punish the individuals rather than taking over the whole consulate.

China is one of several countries with a consulate in Houston, which has an economy roughly the same size as Argentina’s. Houston TV stations KPRC and KHOU said local firefighters weren’t allowed inside the complex to inspect the situation, while KHOU said the fires were later extinguished. The Houston Chronicle said no injuries were reported.

Besides the US Embassy in Beijing, China could target American consulates in the cities of Chengdu, Guangzhou, Shanghai, Shenyang and Wuhan. Closing the consulate in Hong Kong would not only curb Washington’s influence in the former British colony, where pro-government officials have accused the US of acting as a black hand supporting democracy activists, it would limit consular services for thousands of Americans who live there.

Trey McArver, partner at consultancy Trivium China, said the Chinese government would struggle to calibrate a response that didn’t risk further escalation.

“We have seen a step change in US government actions toward China over the past couple of weeks,” McArver said. The closing of the consulate is already big news in China, so the government will need to respond.