It’s only a matter of time before the Trump administration hits China over a range of grievances. The question for CEOs, investors and economic policy makers is how bad things will get. U.S. lawmakers moved on two fronts Wednesday, with Secretary of State Michael Pompeo declaring Hong Kong no longer autonomous from China and the House of Representatives authorizing sanctions against Chinese officials for abuses against Muslim minorities. Other bills in the pipeline would target Huawei Technologies Co., Chinese companies listed in the U.S. and banks that do business with Chinese officials who interfere in Hong Kong’s affairs.

Markets

Investors have so far taken rising tensions in their stride, pushing global share prices to the highest levels since early March on optimism over unprecedented government stimulus and an easing of coronavirus lockdowns. But that doesn’t mean markets are flashing the all-clear sign. China’s yuan tested a record low in offshore trading on Wednesday, while Hong Kong’s $4.9 trillion equity market is valued at its most depressed level relative to global shares since the Asian financial crisis in 1998. Apple Inc., which is highly dependent on China’s consumers and contract manufacturers, has seen its stock lag behind the S&P 500 Index in recent weeks.

The offshore yuan trades near record intraday low of 7.1965

“What would be most worrying to me is if the U.S. and China really turn their tensions into a full-blown financial war — devaluing the currency, limiting funding, blocking listings,” said Li Changmin, managing director at Snowball Wealth in Guangzhou. Hong Kong’s Hang Seng Index could fall more than 10% to a nearly four-year low in the coming months if tensions escalate, said Cliff Zhao, head of strategy at CCB International Securities Ltd. While Hong Kong’s currency is near the strong end of its trading band against the dollar, speculators are betting on significant depreciation.