Hong Kong's Hang Seng Index dropped nearly 5.6% Friday after news broke that Beijing would move to pass a hugely controversial national security law for the Asian financial hub.
The news — which could be the biggest blow to Hong Kong's autonomy since its handover to China in 1997 — also further stoked tensions between China and the United States.
Global stock markets were rattled, and oil took a hit too.
Friday's close was the Hang Seng's worst performance since July 2015.
"The very real threat now, is the return of mass protests to the streets of Hong Kong, a downgrade in trade status with the US, and potentially an exit of large companies" from the city, wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a research note Friday. "Overhanging this, are concerns that China and the United States are about to engage in a new round of trade wards. In all honesty, the timing could not be worse by China."
Other major Asian indexes were also lower. Japan's Nikkei 225 closed down 0.8%, while South Korea's Kospi fell 1.4%. China's Shanghai Composite dropped nearly 1.9%.
European stocks fell in early trading. Germany's DAX shed 0.9%, while France's CAC 40 dropped 0.8% and the FTSE 100 lost 1.5% in London.
Oil also slumped, with Brent crude, the global benchmark, falling 5.2% to $34.18 per barrel. US oil was last trading at $31.86 per barrel, down more than 6%.
"Oil may be in for a tough couple of days if the trade rhetoric between the US and China continues to ratchet higher," Halley wrote.
US stock futures were also lower. Futures for the S&P 500 were down 0.6%, while the Dow and Nasdaq were both down 0.7%.
The law, which is expected to ban sedition, secession and subversion of the Chinese central government, will be introduced through a rarely used constitutional method that could effectively bypass Hong Kong's legislature.
The news was met with immediate criticism by opposition lawmakers in Hong Kong, human rights groups and the US State Department.
Property stocks in Hong Kong were hit hard: Several real estate developers — including Sun Hung Kai Properties, Sino Land and Wharf Real Estate — plunged more than 7.5%. Billionaire Li Ka-shing's company, CK Asset Holdings, fell 8.4%.
US-China tensions have been escalating in recent weeks as the two economic superpowers seek to blame each other for the coronavirus pandemic, a standoff that threatens to reignite a bruising trade war.
On Wednesday, the US Senate unanimously passed a bill that would prevent companies that refuse to open their books from listing on Wall Street. The bill's bipartisan sponsors said the goal is to "kick deceitful Chinese companies off US exchanges."
"Sentiment remains sensitive to any potential trade dispute between the US and China," Michael McCarthy, chief market strategist for CMC Markets, said in a note on Friday.
"The finger pointing about the Covid-19 outbreak from both sides raises concerns that the phase-one trade agreement is in danger," he added, referring to the preliminary agreement signed earlier this year, in which China agreed to buy hundreds of billions of dollars worth of products from the United States.
Beijing on Friday also announced that it will not set an economic growth target for 2020 — the first time it has not done so in decades.
Premier Li Keqiang said during China's annual political gathering that the country must "give priority to stabilizing employment and ensuring living standards, win the battle against poverty, and achieve the goal of building a moderately prosperous society in all aspects."
The absence of a GDP growth target for this year confirms that policymakers accept that after the plunge in the first quarter, "economic growth will be low for 2020 as a whole," said Louis Kuijs, an economist with Oxford Economics.
"The low growth ambitions for this year reflect the fact that a big stimulus package remains unpopular in Beijing amid concerns about excessive leverage and financial instability," he added.
— Julia Horowitz contributed reporting.