Hong Kong led a sell-off across Asian equities Friday after China introduced proposals to enact a national security law for the city, fanning geopolitical tensions and overshadowing optimism about a further easing of virus lockdowns across Europe and the US.

After months of concentrating on the progress and economic impact of the coronavirus, traders' attention has suddenly been flipped back to China-US tensions, which were already being strained by Donald Trump's constant criticism of Beijing's handling of the pandemic.

On the first day of its rubber-stamp parliament, China submitted proposals to strengthen "enforcement mechanisms" in the financial hub, after it was rocked last year by seven months of massive and sometimes violent pro-democracy protests.

The announcement sparked warnings of "the end of Hong Kong" and fears of further unrest, which crippled the city's economy, even before the coronavirus struck.

And it sparked immediate criticism from Washington, with the State Department saying the move was "highly destabilising, and would be met with strong condemnation from the United States and the international community".

Earlier, Trump promised a response, saying: "I don't know what it is, because nobody knows yet. If it happens, we'll address that issue very strongly."

Shares in Hong Kong sank more than three percent in morning trade, with investors worried about its economic future.

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 Kenny Wen of Everbright Sun Hung Kai Co, added: "We could have new protests. Local tensions could trigger Sino-US tensions and the latter is much more stressful for market sentiment and macroeconomy."

Losses elsewhere in Asia were shallower than in Hong Kong.

Tokyo ended the morning 0.4 percent lower and Shanghai fell 0.9 percent, while Seoul and Sydney shed 0.6 percent.

Singapore and Taipei each lost more than one percent, while there was also selling in Wellington and Manila.

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 because of "great uncertainty", 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 strict virus lockdowns as they see easing rates of both deaths and infections, while 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 since the shutdowns began in mid-March to 38.6 million.

The fresh uncertainty also weighed on oil prices, with both contracts down more than two percent, though they remain above $30 thanks to hopes for increased demand as lockdowns are lifted and a huge cut in output by key producers.

- Key figures around 0250 GMT -

Tokyo - Nikkei 225: DOWN 0.4 percent at 20,462.11 (break)

Hong Kong - Hang Seng: DOWN 3.6 percent at 23,397.25

Shanghai - Composite: DOWN 0.9 percent at 2,841.28

West Texas Intermediate: DOWN 2.1 percent at $33.21 per barrel

Brent North Sea crude: DOWN 2.1 percent at $35.29 per barrel

Euro/dollar: DOWN at $1.0938 from $1.0949 at 2100 GMT

Dollar/yen: UP at 107.61 yen from 107.60 yen

Pound/dollar: DOWN at $1.2209 from $1.2223

Euro/pound: UP at 89.59 pence from 89.57 pence

New York - Dow: DOWN 0.4 percent at 24,474.12 (close)

London - FTSE 100: DOWN 0.9 percent at 6,015.25 (close)

dan/jah

MARKIT

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Equities rally stalls on lingering economic uncertainty
Hong Kong (AFP) May 20, 2020
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