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Hong Kong traders brace for renewed turmoil on security law risk

[HONG KONG] Hong Kong's financial markets look set for turbulent trading after Beijing announced its intention to impose a national security law on the city, with potentially dramatic consequences.

The news, which was first reported by local media after the stock market closed on Thursday, triggered an instant reaction: the Hong Kong dollar weakened the most in six weeks, while an exchange-traded fund that invests in the city's stocks fell the most in almost two months in New York trading. Three and 12-month forwards on the Hong Kong dollar rose in New York trading, indicating traders are betting on further weakness.

Concern over the scope of the measures, which would target secession, sedition, foreign interference and terrorism, threaten to end the relative calm that's endured in the city of 7.5 million since the coronavirus outbreak was reported in January. The uncertainty may also spur residents to park their money outside the city, a trend that was seen last year, as well as heightened tensions between the US and China.

Chinese lawmakers were preparing to soon pass security measures in the former British colony, local media including the South China Morning Post reported Thursday, citing unidentified people. The National People's Congress (NPC) later confirmed plans to pass a bill establishing "an enforcement mechanism for ensuring national security" for Hong Kong, without providing details.

The law was expected to pass China's rubber-stamp parliament - delayed from March by the coronavirus outbreak - before the end of its annual session May 28. NPC spokesperson Zhang Yesui told a news briefing Thursday that more details would be made public Friday, when Chinese Premier Li Keqiang is slated to deliver a speech to the body's opening meeting.

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An exchange-traded fund tracking the MSCI Hong Kong Index fell as much as 4.3 per cent Thursday in the US. The city's pegged currency, which has been near the strongest it can trade versus the greenback since late March due to relatively tight liquidity, weakened to 7.7551 overnight. Hong Kong dollar forward points rose late Thursday, indicating traders are betting on tighter liquidity in the foreign-exchange market.

US President Donald Trump said Thursday that the US will "address very strongly" any Hong Kong crackdown. Two US senators also proposed a bipartisan bill that would sanction enforcers of the proposed law.

Hong Kong's economy has struggled under the double blow of anti-government protests and the virus epidemic, with the latter prompting the shuttering of borders to non-residents. Gross domestic product contracted by a record 8.9 per cent in the first quarter from a year ago, and the unemployment rate has risen to the highest since 2009. One in four retailers could disappear by December if sales don't improve, according to an industry association.

Social distancing laws still restrict gatherings to no more than eight people, making a return to the massive protests of 2019 hard to achieve for now. The current rules were recently extended to June 4, when tens of thousands typically gather to mark the military crushing of the 1989 protests in Beijing.

Outflows may also pose a significant threat to the global financial centre. The Bank of England said in a financial stability report last year that protests led to billions of dollars being pulled from investment funds in Hong Kong, an assessment disputed by the Hong Kong Monetary Authority.


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