Hong Kong stocks fell after the Trump administration said it could no longer certify the former colony's political autonomy from China, spurring concern the US will impose sanctions and other measures.
The Hang Seng Index dropped 0.4 per cent in premarket trading, while the Hong Kong dollar was slightly higher. China’s offshore yuan weakened overnight to match its record low of 7.1965 per dollar, set in September last year, and was last at 7.1845.
The Hang Seng suffered its worst single-day loss in five years last week after the Chinese Communist Party shocked investors by unveiling its intention to stifle dissent in Hong Kong. Beijing's move to impose a national security law has escalated tensions between the world's two largest economies, with all eyes now on what the US will do next.
Secretary of State Michael Pompeo announced the decision Wednesday in a statement, saying: "No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground."
Mr Pompeo’s decision opens the door for a range of options, from visa restrictions and asset freezes for top officials to possibly imposing tariffs on goods coming from the former British colony.
Losses in Hong Kong equities may be limited by low valuations. Friday's slump left the Hang Seng trading at 9.5 times reported earnings, about half the multiple of MSCI's global index and the biggest discount since 2016. Few benchmarks trade at single-digit valuations; those that do are mostly frontier markets such as Colombia, Argentina and Sri Lanka.
Mainland money has been supporting the city’s shares, in an echo of state-directed efforts to shore up markets across the border during politically sensitive times. Eligible investors, which range from brokers to insurers and wealthy individuals, have pumped $35.4 billion in this year via cross-border exchange links, the most for the period in data going back to 2017. Buying accelerated as the Hang Seng Index crashed.
The Chinese embassy in the US said it would take “necessary countermeasures” against what it called “foreign meddling in Hong Kong affairs”. China has repeatedly warned that it would retaliate if the US put sanctions on Hong Kong or interfered in its affairs. – Bloomberg