Every year, a convoy of East Indiamen assembled at Whampoa Anchorage near Canton, loaded with goods from Qing Dynasty China, and made the six-month voyage across the Indian Ocean and through the Atlantic to Britain. The value was staggering: one such convoy in 1804 carried goods worth over £8 million in contemporary values. The French knew this. Contre-amiral Pierre César Charles de Sercey had been menacing British shipping in the East Indies since 1796, and two years earlier his squadron had intercepted six East Indiamen in the Bali Strait — only to be deterred when the merchant captains, in a moment of improvised theater, imitated Royal Navy warships well enough to make Sercey hesitate. He never pressed the attack. By 1798 his force had dispersed, too expensive to maintain as a single squadron. Two frigates, Preneuse and Brûle-Gueule, remained at Batavia. Sercey decided to augment them by sailing to Manila and joining the Spanish squadron there, though he remained behind at Surabaya when his frigates made the crossing.

Rear-Admiral Peter Rainier, commanding British naval interests across a vast stretch of ocean from the Red Sea to the Dutch East Indies, heard about the Franco-Spanish junction soon enough to act — barely. He ordered reinforcements to Macau: the 38-gun HMS Virginie and a 74-gun ship of the line. They arrived on 21 January 1799. The allied squadron, under Rear-Admiral Ignacio María de Álava, sailed from Manila on 6 January with six ships — the 74-gun Europa and Montañés, the frigates Santa María de la Cabeza and Santa Lucía, and the French Preneuse and Brûle-Gueule. Álava arrived in the Wanshan Archipelago on 27 January, meaning Hargood had six days to prepare before the enemy appeared. Álava knew Intrepid was in Macau, because Danish merchants had told him. He did not know about the reinforcements. That intelligence gap would shape everything that followed.

Hargood sailed out to meet Álava, both squadrons forming lines of battle and steering toward each other, HMS Virginie leading the British line. What happened next is the crux of a dispute that neither side ever resolved. Hargood reported that the Franco-Spanish squadron turned and fled into the Wanshan Archipelago's island channels, anchored as darkness fell, and slipped away before dawn. He attributed this to, in his own words, "their dread of a conflict that would in all probability have terminated in their disgrace." Álava told a different story in the Manila Gazette: he claimed it was Hargood who retreated, pursued closely by Europa, and that he would have pressed home the attack but for damage to the rigging on Montañés. Neither account explains the same central fact — the assembled China Fleet sat unprotected at anchor in Macau's harbor, and the allied squadron, which had sailed across the South China Sea specifically to destroy it, withdrew without touching it.

Historian C. Northcote Parkinson gave the fairest summary: "It is perhaps fair to conclude that neither squadron was spoiling for a fight." The French officers who had expected a triumph reacted badly. Lhermitte, captain of Preneuse, responded with what his contemporaries described as disgust. Sercey, at Surabaya and removed from the action entirely, was furious. Richard Woodman, writing about the naval war in the East Indies, concluded that the French had thrown away "at a stroke the chance not only of seizing a valuable convoy, but of establishing Franco-Spanish dominance in Indo-Chinese waters." Hargood sailed from Macau with the China Fleet on 7 February and passed unimpeded into the Indian Ocean. Álava did send Europa and the frigate Fama back to Macau in May, but they accomplished nothing. The war in these waters faded toward the Peace of Amiens in 1802. Preneuse never made it: she was intercepted by a British blockade squadron on 11 December 1799, driven ashore, and destroyed.

The Wanshan Archipelago — then known to European sailors as the Ladrones Islands, the Spanish word for thieves — provided the geography of the encounter. Its scatter of 104 islands, channels, and anchorages south of the Pearl River estuary offered cover to a squadron that preferred navigation to battle. Ships could anchor behind islands, use the channels to lose pursuers, wait for dawn or darkness. The same geography that made the Ladrones useful to smugglers and pirates served Álava's withdrawal just as well. The islands had no stake in the outcome; they simply remained, as they always had, between Macau and open water. The British carried the convoy home. The French carried home a story.