China on Monday threatened counter measures against the United States if it is punished for plans to impose on Hong Kong a sedition law that the business hub’s security chief has hailed as a new tool to defeat “terrorism”.

The new security law bans treason, subversion and sedition in Hong Kong and comes after months of massive, often-violent pro-democracy protests last year.

But many Hongkongers, business groups and Western nations fear the proposal could be a death blow to the city’s treasured freedoms, and thousands took to the streets on Sunday despite a ban on mass gatherings introduced to combat coronavirus.

As police dispersed the crowds with tear gas and water cannon, Washington’s national security adviser, Robert O’Brien, warned the new law could cost the city its preferential US trading status.

But China’s foreign ministry said Beijing would react to any sanctions from Washington.

“If the US insists on hurting China’s interests, China will have to take every necessary measure to counter and oppose this,” foreign ministry spokesman Zhao Lijian told reporters on Monday.

Hong Kong has become the latest flashpoint in soaring tensions between the world’s two superpowers which China has likened to “the brink of a new Cold War”.

The refusal to grant Hongkongers democracy has sparked rare bipartisan support in an otherwise bitterly divided Washington during the Trump administration.

Beijing portrays the city’s protests as a foreign-backed plot to destabilise the motherland and says other nations have no right to interfere in how the international business hub is run.

Protesters, who have hit the streets in their millions, say they are motivated by years of Beijing chipping away at the city’s freedoms since it was handed back to China by Britain in 1997. Hong Kong enjoys liberties unseen on the mainland, as well as its own legal system and trade status.

Campaigners view the security law proposal as the most brazen move yet by Beijing to end free speech and the city’s ability to make its own laws.

Of particular concern is a provision allowing mainland Chinese security agents to operate in Hong Kong, with fears it could spark a crackdown on those voicing dissent against China’s communist rulers. On the mainland, subversion laws are routinely wielded against critics.

The proposed law, which China’s rubber-stamp legislature is expected to act on quickly, will also bypass Hong Kong’s own legislature.

The city’s influential Bar Association on Monday described the proposed motion as “worrying and problematic” – and warned it may even breach the territory’s mini-constitution.

The proposal has spooked investors with Hong Kong’s stock exchange suffering its largest drop in five years on Friday. On Monday it had yet to recover, closing just 0.10 per cent up.