Via Financial Times

Shares in Hong Kong fell almost 2 per cent a day after widespread demonstrations returned to the streets, as investors scrambled to figure out the implications of China’s move to impose a national security law on the city.

The Asia financial hub’s benchmark Hang Seng index fell as much as 1.8 per cent on Monday morning after police fired tear gas and arrested about 180 people among the thousands who marched on Sunday to protest the new law.

After months of violent anti-government demonstrations last year, the spread of coronavirus had resulted in relative political calm in 2020.

However, that quiet was shattered by Beijing’s decision to draft legislation that would prohibit treason, secession, sedition and subversion, as well as permitting China’s state security services to maintain a formal presence in the semi-autonomous territory. China’s rubber-stamp legislature will pass a resolution on the matter on Thursday.

Traders have expressed concern that Beijing’s move could undermine the territory’s status as a global financial centre, and potentially prompt official retaliation from Washington against a backdrop of rising US-China trade friction. The Hang Seng index plunged 5.6 per cent on Friday after Beijing announced the proposed legislation.

“I don’t know how you disassociate Hong Kong from China in any type of [US] retaliation because they’re almost one and the same when it comes to the economies working in tandem,” said one Asia-focused equities and currencies trader.

Some investors in the city had rejigged their portfolios in recent weeks out of concern that political tension could flare up again.

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Ronald Chan, founder of Hong Kong-focused fund Chartwell Capital, said he had significantly reduced his allocation to the city’s stocks ahead of the security law announcement. He is instead holding more cash and looking at opportunities in Japan.

“We all knew this was going to happen. We have done what we can to hedge the market and brace for the storm ahead,” Mr Chan said. “The national security law could be the breaking point between China and the US.”

The Hang Seng trimmed some losses to be down 1 per cent in late-morning trading, with property and financial names among the poorest performers.

Elsewhere in the region, Japan’s Topix index was up 1.2 per cent after the country’s health minister said a nationwide state of emergency due to coronavirus could be fully lifted on Monday, allowing businesses to reopen. Australia’s S&P/ASX 200 index rose 1.7 per cent as preliminary data showed external demand for resource commodities remained strong.

On Friday, Wall Street’s S&P 500 added 0.2 per cent as fears over renewed US-China tensions tempered a recent equities rally that has been fuelled by central banks’ support measures.

Markets in both the US and the UK are closed for public holidays on Monday.

Additional reporting by Daniel Shane in Hong Kong