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Hong Kong stocks tumble as China’s security law blindsides traders

Hong Kong’s stock market tumbled after the Chinese government said it planned to impose a national security law on the city in a move that blindsided traders and prompted concerns over the Asian financial hub’s future.

The Hang Seng skidded as much as 5.7 per cent on Friday, putting the index on track for its worst one-day performance in nearly five years, owing to investor concerns that Beijing’s show of legal force could reignite mass protests in Hong Kong and worsen relations between the US and China. Tensions have intensified as Washington has attempted to pin blame on China for the coronavirus pandemic.

Traders in Hong Kong said they had been caught off-guard by the late-night announcement. Some were concerned it could lead to the end of the territory’s special trading status with the US.

President Donald Trump said on Thursday that if Beijing passed the Hong Kong security law, the US would “address that issue very strongly”.

“The key is whether the national security law will affect US-China relations,” said Kenny Wen, a Hong Kong-based strategist at brokerage Everbright Sun Hung Kai. Mr Wen added that further falls were likely for Hong Kong stocks if protests erupted over the weekend.

Louis Tse, managing director at VC Asset Management in Hong Kong, said traders had been surprised by the move, but added that Beijing had strong incentives not to upend Hong Kong’s financial system. The city provides Chinese companies with a vital platform for raising funds offshore.

“Hong Kong is just like an ATM, you key in the password and you get the money,” Mr Tse said. “China will have to contemplate quite a few things before they actually stamp their authority on Hong Kong by passing this law.”

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MTR Corp, the company that runs Hong Kong’s metro system and was targeted by protesters during the unrest last year, fell 10.4 per cent, making it one of the worst performing Hang Seng members.

Another equity trader based in the city pointed out that investors had not taken positions in the market that reflected any fears of a crackdown. “I don’t think anyone really thought they would do this at this time,” he said. “The short [selling] activity doesn’t reflect it.”

The security law’s impact was also felt in trading of the Hong Kong dollar. The currency, which is permitted to trade in a narrow band versus its US counterpart, weakened on Thursday evening immediately following the announcement before stabilising on Friday.

Line chart of HK$/US$ showing Security law hits Hong Kong's dollar

In China, the CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 2.2 per cent as the NPC — Beijing’s rubber stamp parliament — declined to set a GDP target for the first time. The country faces its most severe economic downturn since the 1970s because of the coronavirus pandemic.

Tai Hui, Asia-Pacific markets strategist at JPMorgan Asset Management, said dropping the economic growth target was “realistic”. “There are just too many variables. You’ve got the outbreak, [and] you’ve got the escalation in US-China trade tensions,” he said.

Additional reporting by Daniel Shane in Hong Kong

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