(Bloomberg) -- Hong Kong, until recently an oasis of political stability in Asia, is now gripped with unprecedented regulatory and legal uncertainty that threatens its position as one of the world’s top financial hubs.

China’s imposition of a sweeping, but vaguely worded national security law on June 30 has already begun to change the business landscape. Tech giants like Google and Facebook Inc. have suspended processing data requests from the government. Banks are struggling to figure out how to comply with the contradictions in U.S. and Chinese legal changes. Even mainland bankers in the city got a shock when China started taxing their incomes at rates as high as 45%, compared with 15% in Hong Kong.

On Tuesday, President Donald Trump stripped away certain special privileges for Hong Kong under U.S. law. The landmark decision eliminated a range of measures that allowed the capitalist city different treatment from the mainland, from preferences for passport holders to allowing access to sensitive technologies to a Fulbright scholar exchange program. And he signed a law that would punish banks for dealing with officials facing sanctions.

The escalating political turbulence, which follows months of anti-government demonstrations last year, has jarred a city that for decades served as a stable base for multinationals to access China. Now it’s firmly in the cross-hairs of a broader fight between Trump and Chinese President Xi Jinping, adding an element of unpredictability that could reshape the business environment even more than last year’s protests and the deep recession exacerbated by the pandemic.

“The U.S. measures, alongside Beijing’s own crackdown on Hong Kong, are fast turning the city from an open, stable international financial center to contested ground at the very front lines of a rapidly intensifying geopolitical conflict,” said Antony Dapiran, a lawyer based in the city and author of “City on Fire: The Fight for Hong Kong.”

China shot back immediately after Trump’s announcement, pledging to retaliate with unspecified strong countermeasures against U.S. officials and entities. Regina Ip, a member of Hong Kong leader Carrie Lam’s advisory Executive Council, said the U.S. measures would actually achieve the opposite of what Washington intends.

“It will only drive more Hong Kong people to rely more and more on mainland China for support for our prosperity and stability,” Ip said in an interview. “This will not really effect the foundations of Hong Kong’s success as an international financial center, because the financial measures will only be imposed on individuals and entities identified under the act. It’s not as sweeping as some have suggested.”

Hong Kong’s benchmark Hang Seng Index closed little changed Wednesday, after an initial 1.6% gain was wiped out. The gauge is down 11% over the past 12 months, compared with a 2.8% gain by MSCI’s index of world stocks.

The real-world impact of the U.S. moves on Hong Kong’s trade will likely be limited, as the vast majority of the city’s shipments to the U.S. consist of re-exports, or goods passing through the city with no substantial modifications. Still, the marked deterioration in U.S.-China ties over the past few months, which has seen harsh rhetoric amid broader reconciliation over trade war issues harden into specific policy retaliations, means that Hong Kong is likely in for more turbulence as U.S.-China ties worsen.

“I still think that the bar for the U.S. to take drastic actions is high,” said Tommy Wu, a senior economist at Oxford Economics. “But the uncertainty that has been generated will affect foreign business investment decisions in Hong Kong and will hurt the potential growth of the city.”

‘Big Blow’

Hong Kong’s government, as well as China’s top officials overseeing the former British colony, have defended the national security law as a necessary instrument to restore stability that will only curtail criminal activity, not restrict freedoms of speech or expression. By one gauge of confidence in the finance hub -- the flow of capital -- Hong Kong appears to be holding up, with key metrics suggesting that, if anything, money continues to flow into the city rather than leave.

Year-to-date, mainland investors have net bought a combined HK$356 billion worth of Hong Kong stocks, a record high compared with the same period in previous years, according to data compiled by Bloomberg. The pace of buying has picked up recently, with the net purchase in July is set for the biggest monthly inflow since March.

However, the extremely broad provisions of the new law -- which bars subversion, secession, terrorism and collusion with foreign forces -- have left residents scrubbing social media accounts, business owners taking down pro-democracy posters, and business chambers saying companies may move assets and capital to other financial centers in part due to difficulties finding talent in Hong Kong.

Things could get worse yet if banks and other financial institutions eventually face sanctions under the Hong Kong Autonomy Act that Trump signed Tuesday. Even if Beijing pushes back, the U.S. actions will still hit the city’s global reputation in financial markets and could make it a less favorable spot to conduct business, said Willy Lam, an adjunct professor at the Chinese University of Hong Kong’s Centre for China Studies, who has authored numerous books on Chinese politics.

“It’s also possible that fewer American businesses may want to do business with Hong Kong,” Lam said. “They may move directly to Shanghai or other financial centers in Asia such as Singapore.”

Rents for luxury homes on Hong Kong Island fell by 2.6% in the second quarter from the previous three months, according to Savills Plc. The property agency expects rents to fall even further later in the year as more expatriates will be forced to leave the city when many firms are shedding staff.

Despite the raft of bad news, Trump this week endorsed the trade deal reached with China earlier this year. And he ruled out more drastic measures that could undermine Hong Kong’s dollar peg, which could impact financial stability across the globe.

There’s little sense things will improve even after the U.S. election in November. Joe Biden, the presumptive Democratic nominee, is likely to stick by all of Trump’s recent moves if the former vice president takes office, said Richard McGregor, a senior fellow at the Lowy Institute in Sydney and author of “The Party: The Secret World of China’s Communist Rulers.”

“There’s no floor under the U.S.-China relationship,” he told Bloomberg Television. “We keep finding new lows.”

©2020 Bloomberg L.P.