China's plan of national security law in Hong Kong puts Trump in an unwelcome spot with Xi

• The weekend sees the first protests of 2020 in Hong Kong.
• Chinese government threatens Hong Kong's autonomy and civil liberties.
• Pro-lawmakers are seeking a one country one system regime.
• The proposal has provoked outrage in Congress, markets will respond. 

It has been brewing. Relations between China and much of the Western world have taken a turn for the worst in recent days and the weekend news is likely to have the financial and commodity markets on the back foot as we open for trade for the new week.

We are seeing the first protests of 2020 in Hong Kong where thousands of protesters took to the streets to oppose the Chinese government's move to impose a controversial national security law, which threatens the city's autonomy and civil liberties.

China announced last Thursday that its plans to introduce the new national security law in Hong Kong which is expected to ban sedition, secession and subversion against Beijing. It will also enable mainland Chinese national security agencies to operate in the city for the first time.

Pro-lawmakers are seeking a one country one system regime and one which will be written into law within a week, bypassing the city's legislature, as a result of the National Peoples Congress. The law will also enable mainland Chinese national security agencies to operate in the city for the first time.

Chinese Foreign Minister Wang Yi said on Sunday that Beijing must institute the law in Hong Kong without delay, arguing that it is the role of China's central government to create a safeguard and enforcement mechanism for national security.

"We must get it done without the slightest delay," Wang said.

Announcements sparked an immediate outcry

Wang argues that the law will create more stability and confidence in the Special Administrative Region and provide a better environment for security. However, the announcements sparked immediate outcry from opposition lawmakers in Hong Kong, human rights groups and multiple international governments. 

 Beijing’s move to tighten its grip on Hong Kong drew swift condemnation from US officials:

US Secretary of State Mike Pompeo has condemned the proposed national security law. Pompeo is warning that the passage of the legislation would be a "death knell" for Hong Kong's autonomy. The US stands "with the people of Hong Kong," Pompeo proclaimed. 

The United States strongly urges Beijing to reconsider its disastrous proposal, abide by its international obligations, and respect Hong Kong's high degree of autonomy, democratic institutions, and civil liberties, which are key to preserving its special status under US law,

– Pompeo said.

The straw that broke the camel's back?

The proposal has provoked outrage in Congress where bipartisan support has mounted-up quickly for new sanctions on Chinese officials and entities. Some senators calling for sanctions, but the US President Donald Trump is reluctant to jeopardize his ties to President Xi Jinping. 

To date, Trump who has shown a lack of interest in Hong Kong’s plight. There has been an overwhelming desire to carry out terms of a trade deal with Beijing. However, this latest move could well precipitate a crisis in US-China relations – it could well be the straw that broke the camel's back – Trump is already seeking compensation for what he calls the Chinese flu.

“I think President Trump is going to be at the end of his goodwill with Xi here,” said Stephen Bannon, a former top Trump strategist and  China’s Communist leadership hardliner. “It’s an outrage,” he said of Beijing’s proposed new security powers over Hong Kong.

So, far, the protests have been less violent than those of during the 70th anniversary of the founding of the People's Republic of China last June. No rubber bullets have been reported, only tear gas, although an online stream has shown protesters throwing objects at police.

"One country, two systems" requires the protection of a national security law to operate smoothly. US hopes HongKong's elections produce pro-US forces in power, thus enabling the US to manipulate HK's affairs. It just won't work: Editor-in-Chief, Hu Xijin, of The Global Times tweeted earlier today.  

Market implications

Bearish:

This evokes insecurity in the markets as risks of a US-China conflict and renewed Hong Kong protests grow. The start to the week will likely kick off on a sour note and risk-off. In response to Thursday's announcement by Beijing, markets were on the back foot, especially those in Hong Kong. Hong Kong’s Hang Seng index plunged 5.56% by the close on Friday.

White House national security adviser Robert O'Brien said on Sunday said China’s proposed national security legislation for Hong Kong could lead to US sanctions and threaten the city’s status as a financial hub. Such an outcome would impact financial markets.

As for FX, AUD trades as a proxy to global trade and what happens between the US and China:

• AUD/USD Forecast: Losing bullish potential, but close to 0.6600