In a move aimed at punishing China, President Donald Trump has ordered his administration to begin the process of eliminating special US treatment for Hong Kong.
Howver he stopped short of calling an immediate end to privileges that have helped the territory remain a global financial centre.
In making the announcement, Trump used some of his toughest rhetoric yet against China, saying Beijing had broken its word over Hong Kong's autonomy by moving to impose new national security legislation and the territory no longer warranted US economic privileges.
At a White House news conference, Trump called this a tragedy for the people of Hong Kong, China and the world.
"We will take action to revoke Hong Kong's preferential treatment as a separate customs and travel territory from the rest of China," Trump said, adding that Washington would also impose sanctions on individuals seen as responsible for "smothering - absolutely smothering - Hong Kong's freedom."
China's state-run Global Times newspaper called Trump's announcement "recklessly arbitrary."
The President attacked Beijing over the coronavirus pandemic, saying China's "malfeasance" was responsible for massive suffering and economic damage worldwide.
Trump also said he was issuing a proclamation to better safeguard vital university research by suspending entry of foreign nationals from China identified as potential security risks.
Sources, including a current US official, told Reuters on Thursday that the latter move could affect 3,000 to 5,000 Chinese graduate students.
Financial markets saw Trump's announcement as more bark than bite and US stocks finished mostly higher as it was seen as less threatening to the US economy than investors had feared.
While Trump gave no time frame for moves, two sources said that options under consideration included setting a deadline of a year from now for China to step back or else face full revocation of Hong Kong's special status.
Such a deadline would buy time to avoid a major rupture in relations ahead of the November 3 US election.
Earlier, Hong Kong's Beijing-backed government told Washington to keep out of the national security debate, and warned that withdrawal of the financial hub's special status could backfire on the US economy.
Chinese authorities and Hong Kong's government say the security legislation poses no threat to the city's autonomy and the interests of foreign investors will be preserved.