Fears that moves by China to tighten its political control over Hong Kong will lead to heightened tensions between Beijing and Washington have weighed on international markets.
With investors already anxious about the economic damage caused by the Covid-19 pandemic, the crackdown on dissent in Hong Kong caused shares to fall in Asia and in the US on Friday.
Hong Kong’s Hang Seng fell 5.6%, its worst performance since 2015. China’s Shanghai composite fell 1.9%, South Korea’s Kospi was down 1.4%, and Japan’s Nikkei index dropped 0.8%. By noon in New York the Dow Jones industrial average was down 0.5% and the S&P 500 was down 0.2%.
European markets fell sharply in early trading before regaining ground. The FTSE 100 closed down 0.4%, back below the 6,000 mark at 5,993.
Oil prices also dropped – falling by 5% at one point – after Beijing proposed a national security law that would allow it to bypass lawmakers in Hong Kong and ban “treason, secession, sedition and subversion”.
The prospect of a fresh wave of democracy protests in the former British colony led to drops in luxury brands such as Dior and in the two UK banks most exposed to Hong Kong: HSBC and Standard Chartered. Shares in Prudential, the Asia-focused insurer, fell 9%, making it the biggest faller on the FTSE 100 on Friday.
Beijing’s tough line threatens a fresh deterioration in already frosty relations between China and the US. Donald Trump said Washington, which was targeting its geopolitical rival over trade, would react “very strongly” against an attempt to gain more control over Hong Kong.
Jim Reid, a research strategist at Deutsche Bank, said the US-China relationship seemed to be more in terminal decline than it did six to 12 months ago. Republicans and Democrats would react strongly to Beijing’s threatened action, he said.
“This will likely draw a large amount of opposition given the pro-democracy protests in the country over the past year. This could be another wedge between China and the US, given how many US politicians on both sides of the aisle supported Hong Kong’s efforts last year,” Reid said.
China also announced that – for the first time since it started setting goals for the economy in 1990 – it was not setting a growth target for this year. While expected by the financial markets, the decision has hardened the belief that recovery in the world’s second-biggest economy will be protracted.