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Here’s Why Hong Kong’s Hang Seng Index Plunged by Over 5% Today

What happened

Hong Kong’s benchmark stock index, the Hang Seng Index, fell sharply on Friday. The index at one point during the day was down 5.7% and ended the day at 22,930 points. That meant the index lost 1,349 points (or 5.6%) for its worst day in nearly five years.

Among the biggest-hit sectors was property as some key names such as Wharf Real Estate Investment Company (SEHK: 1997), Sino Land Company Limited (SEHK: 83), and Link REIT (SEHK: 823) all finished the day down by over 9%.

So what

The trigger for the massive market sell-off was news that China’s government was planning to bypass Hong Kong’s legislature and pass a security law that would crack down on secession and sedition in the city.

Considered a Special Administrative Region (SAR) of China, Hong Kong has long enjoyed special trading rights and privileges that were not available to mainland Chinese cities.

However, with last year’s anti-government protests in Hong Kong, the Beijing government, according to reports in the South China Morning Post, is now “out of patience” with the lack of any progress on the passing of the law in Hong Kong.

Many observers now fear that the Chinese government is heralding the death of “one country, two systems” upon which Hong Kong’s Basic Law is based.

Now what

Investors should be watching how the geopolitics plays out between the two global superpowers; the US and China.

The US has already issued a rebuke to these plans by the Chinese government and President Trump has vowed a “strong” response to any passing of a national security law by China’s government.

The tensions between the two have already seen the initial threats of the delisting of Chinese American Depositary Receipts (ADRs) that are traded in the US.

Any material clampdown there could impact the numerous Chinese companies listed in the US, including household names such as Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 1988), Baidu Inc (NASDAQ: BIDU) and JD.com Inc (NASDAQ: JD).

For longer-term investors, the recent developments reinforce the fact that the two superpowers are on two separate tracks. Two completely separate ecosystems – one backed by the US and one by China – could eventually exist.

Over time, it will probably also highlight the wisdom of being properly diversified across both US and Chinese stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips doesn’t own shares in any companies mentioned.