After months of concentrating on the economic impact of the coronavirus, traders’ attention flipped back to China-US tensions, already exacerbated by Donald Trump’s constant criticism of Beijing’s handling of the pandemic.
On the first day of its rubber-stamp parliament, China unveiled proposals to strengthen “enforcement mechanisms” in Hong Kong, after it was rocked last year by seven months of massive — and sometimes violent — pro-democracy protests.
The plans sparked warnings of “the end of Hong Kong” and fears of further unrest, which crippled the city’s economy before the coronavirus struck.
There was also criticism from Washington, with the State Department saying the move would be “highly destabilising, and would be met with strong condemnation from the United States and the international community”.
Shares in Hong Kong sank more than five percent, with financials and property firms battered as investors fretted about the city’s economic future.
“Riots in the street and plummeting real estate markets might be the least of Hong Kong’s building wall of worry as this authoritarian national security plan will most certainly bring into question (the city’s) status as a global banking centre,” said Stephen Innes of AxiCorp.
US lawmakers have already passed a law that would strip the city’s preferential trading status in the United States if it no longer enjoys autonomy from the mainland.
“The geopolitical risks are meaningful,” David Riley, chief investment strategist at BlueBay Asset Management LLP said on Bloomberg TV. “It’s a concern for the market, and is a potential source of weakness and a correction.”
More stress for markets
And OANDA’s Jeffrey Halley added: “The very real threat now is the return of mass protests to the streets of Hong Kong, a downgrade in trade status with the US and potentially an exit of large companies from the SAR. Overhanging this, are concerns that China and the United States are about to engage in a new round of trade wars.”
Losses elsewhere in Asia were shallower than in Hong Kong.
Tokyo fell 0.8 percent, while Shanghai, Seoul, Taipei, Bangkok, Manila and Mumbai dropped more than one percent.
Singapore shed 2.3 percent and Sydney was one percent off, while Wellington dropped 0.6 percent.
In early trade, London, Paris and Frankfurt all tumbled more than one percent.
The Chinese congress also saw leaders make the rare move of not setting an annual growth target this year owing to the virus crisis, with Premier Li Keqiang saying that Beijing will “give priority to stabilising employment and ensuring living standards”.
Concerns about China-US tensions took away from news that more countries were edging out of virus lockdowns after new deaths and infections eased and observers said the worst of the pain for the global economy may have passed.
Still, the US reported another 2.43 million workers applied for unemployment benefits last week, bringing the total of newly jobless since the shutdowns began in mid-March to 38.6 million.
The fresh uncertainty also weighed on oil prices, with WTI off nearly five percent with profit-taking also playing a part after weeks of strong gains.
Both main contracts were above $30 per barrel however, thanks to a huge cut in output by key producers and on hopes for increased demand as lockdowns are lifted.