May 22, 2020 / 7:21 AM / 15 days ago

Hong Kong stocks set for worst day since 2015 as Beijing pushes security law

(Updates prices, recasts headline, adds analyst quotes)

By Noah Sin and Tom Westbrook

HONG KONG/SINGAPORE, May 22 (Reuters) - Hong Kong’s stock market tumbled more than 5% to seven-week lows on Friday as China moved to impose new national security laws on the city, raising fears of a revival of the civil unrest that convulsed the financial hub for much of last year.

The battered Hang Seng Index led losses in Asian markets and was headed for its largest daily percentage drop since 2015. The property sector sub-index slumped 8%, and was set for its worst day since 2008.

The sell-off was triggered by China’s proposed legislation, which empowers its parliament to establish legal system and enforcement mechanisms to ensure national security in Hong Kong and Macau, its other semi-autonomous city.

Worries that the proposed legislation could reignite the pro-democracy demonstrations of 2019 and heighten tensions between Beijing and Washington spooked investors.

“At the heart of this, what it’s basically doing is circumventing Hong Kong’s Basic Law,” said Rob Carnell, ING’s chief economist in Asia, referring to the mini-constitution that affords the city freedoms unavailable in mainland China.

Carnell said the proposal called into question the notion that Hong Kong’s Basic Law, drawn up to guide Hong Kong’s relations with Beijing after its handover from British rule in 1997, would remain unchanged for another 20 years.

“I think this is probably going to go quite explosive quite quickly.”

Activists in Hong Kong called for a march against Beijing’s plans, portending an end to a period of relative calm in the city.

The Hang Seng index dropped 17.8% from peak to trough between April and August last year in the wake of months-long protests against a controversial Chinese extradition bill and heightened Sino-U.S. trade tensions.

Friday’s drop also eclipses any single-day fall during the height of unrest last summer, or during March’s panic selling as the coronavirus pandemic spread.

“Now that this pandemic appears to be easing and the city is getting back to normal, it’s almost a check on where we were before,” said Jim McCafferty, Nomura’s co-head of APAC equity research. “The protests and the reminder of protests are refreshed.”

Adding to pressure, China on Friday also dropped its annual growth target for the first time as the pandemic upends its economy, which weighed on mainland stocks and investors’ mood globally.

The already-tense U.S.-China relations seemed set to worsen as the U.S. State Dept warned Beijing over the new law on Thursday and as Republican and Democratic senators threatened sanctions on Chinese officials.

An index of Hong Kong-listed Chinese shares dropped as much as 4.9% to its lowest level since April 2.

The Hong Kong dollar weakened to 7.7558 against the U.S. dollar, its weakest level since May 5, while interbank interest rates edged up across the curve.

Editing by Vidya Ranganathan & Shri Navaratnam

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