Hong Kong stocks are bearing the brunt of escalating actions taken by Washington and Beijing to protect their national security.

The Hang Seng Index fell 0.6% on Monday to close at a six-week low. Top of investor concerns is deciphering the impact on the city’s listed firms from a host of measures taken in the Chinese and U.S. capitols. The broad sweep of Hong Kong’s new national security law, a planned ban on U.S. residents doing business with Tencent Holdings Ltd.’s WeChat app, as well as sanctions on some officials in the former British colony all hold potential for negative consequences for various firms and industries.

Investors hold a dim view of Hong Kong’s outlook: the benchmark trades at the cheapest relative to MSCI Inc.’s global peers since the Asian financial crisis in 1999 on a price-to-book basis. Ironically, Chinese and U.S. stocks are doing a lot better. While the Hang Seng Index is down 14% this year, China’s CSI 300 Index of stocks has climbed 15%, and the S&P 500 Index has gained 4%.

“Any investor who’s considering buying assets in the city, be it stocks or property, will want to apply a further discount to reflect rising political uncertainty,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai Co.

hong kong stocks

Take Tencent. On Friday the stock plunged more than 10% amid confusion over the scope of the ban, before paring its loss to 5% after a U.S. official clarified the order. No matter, the shares fell a further 4.8% on Monday. The stock, which reports earnings on Wednesday, has been the biggest support to the Hang Seng Index this year, while analysts are overwhelmingly bullish on the stock.

What about sanctions on Hong Kong’s leader Carrie Lam and others? While the city’s banking regulator said local banks had no obligation to follow U.S. sanctions under domestic laws, financial institutions risk getting caught between Beijing and Washington no matter how they react.

“Banks are in a dilemma,” Wen said. “If they follow the U.S. and apply the sanctions, Beijing will be annoyed. If they do not apply sanctions, the U.S. will be angry.”

HSBC Holdings Plc., which has a historically dominant position in the city, has faced criticism from both China and the U.S. The British bank’s shares have tumbled 45% this year and are close to falling below their 2009 low.

Adding to the heightened atmosphere was the high-profile arrest on Monday of media tycoon and democracy activist Jimmy Lai under the national security law. Television footage showed dozens of police officers raiding his newspaper Apple Daily. Next Digital Ltd., the listed shares of his media network, plunged as much as 17% after the news before surging as much as 344% amid calls for investors to show their support by buying the stock.

For Cliff Zhao, head of strategy at CCB International Securities Ltd., investors have no reason to panic. Lai’s arrest was expected, while sanctions on Hong Kong officials were not too surprising, he said.

“There’s no sign of foreign capital fleeing Hong Kong,” Zhao said. “For any foreign investors who want a share of China’s economic growth, they have no other choice than to use Hong Kong as a proxy.”

There are signs of solidity. The Hong Kong dollar remains near the strong end of its trading band against the greenback, while the stock market has been the recipient of heavy inflows from mainland investors.

Yet each new development brings the risk of further escalation between the two world powers.

Raymond Chen, a portfolio manager at Keywise Capital Management (HK) Ltd., is cutting exposure amid concern foreign funds will exit the city.

“The increasingly worsening China-U.S. tensions will deal a blow to markets,” Chen said. “Right now the sanctions are on technology sectors and officials but it’s possible that we’ll see similar actions in the financial segment in future. Risk reward in equities is less attractive now and I have started taking profits from last week in both China and Hong Kong markets.”