Hong Kong fell 0.4 per cent in the morning session and Shanghai shed 0.1 per cent, while China's yuan was also slightly lower
Asian markets mostly fell Thursday as optimism over the China-US trade talks took a jolt after Donald Trump signed into law a bill recognising Hong Kong's rights, prompting an angry response from Beijing.
Global equities have been surging in recent weeks with Wall Street hitting multiple records on expectations, the much-vaunted negotiations would result in a partial pact soon.
Trump on Wednesday put his name to the Hong Kong Human Rights and Democracy Act, which requires the president to annually review the city's favorable trade status and threatens to revoke it if the territory's freedoms are quashed.
He also agreed to legislation banning sales of tear gas, rubber bullets and other equipment used by Hong Kong security forces in putting down protests that have wracked the city since June and have battered its economy.
The president spoke of "respect" for his Chinese counterpart Xi Jinping and said he hoped Beijing and Hong Kong could "amicably settle their differences".
For his part, Trump had seemed reluctant to sign the bill with the trade talks still ongoing, but with almost unanimous US congressional support for the measure, he had little political room to maneuver.
However, China hit out at the decision, calling it "extremely abominable", and threatened "firm countermeasures", though it did not specify what they would be. Hong Kong's government expressed "extreme regret" at the move.
The signing, while not entirely surprising, spooked investors, who had been in an upbeat mood following a string of positive comments from both sides indicating the first part of a wider agreement was close.
"Trump's signing the Hong Kong bill is likely to trigger another risk-off session," said Hao Zhou, senior emerging markets economist at Commerzbank AG. "The phase one deal is likely to be delayed."
Hong Kong fell 0.4 per cent in the morning session and Shanghai shed 0.1 per cent, while China's yuan was also slightly lower.
Singapore slipped 0.3 per cent and Seoul dropped 0.2 per cent while Taipei and Manila also retreated.
However, Tokyo ended the morning up 0.1 per cent, Sydney rose 0.3 per cent and Jakarta added 0.1 per cent.
Wellington climbed one per cent on data showing a pick-up in New Zealand business confidence.
"Now the big question is, does China decide to compartmentalise the Hong Kong issues away from the phase one deal. So that's where the risk lies now," said AxiTrader's Stephen Innes.
Wall Street had provided another record lead following figures showing US growth was faster than originally reported in the July-September period, easing concerns about the world's top economy.
However, China remains under pressure, and a top government adviser on Wednesday warned its economy could expand slower than six per cent this year. The government had fixed a growth target of between six and 6.5 per cent for 2019.
Worries about the trade talks also weighed on oil prices, with traders concerned that the prolonging of the China-US trade war would hit long-term demand.
On currency markets, the pound rallied after a much-anticipated opinion poll suggested Prime Minister Boris Johnson was on course to win a healthy majority in next month's general election.
The huge YouGov poll of around 100,000 people sparked buying in the pound on hopes a big Conservative party win would allow Johnson to push through his Brexit deal and avoid a no-deal divorce from the European Union.