The Human Rights and Democracy Act mandates an annual review, to check if Hong Kong has enough autonomy to justify its special status with the US, BBC reported.
The US move came almost simultaneously along with a key development in the estuary state on Thursday where police and firemen entered a university which had been under police siege for more than 10 days.
"I signed these bills out of respect for President Xi, China, and the people of Hong Kong. They are being enacted in the hope that Leaders and Representatives of China and Hong Kong will be able to amicably settle their differences leading to long term peace and prosperity for all," Trump said in a statement on Wednesday.
On the other hand, Hong Kong's government said the bill would send the wrong signal and would not help to ease the situation.
China said it would take "firm counter measures" - accusing Washington of "absolutely sinister intentions", foreign media reported.
The Chinese state media said the bill was "unnecessary and groundless, and will damage exchanges between the region and the US".
The US President is seeking a deal with China, in order to end a damaging trade war between the two countries.
He had previously been noncommittal about whether he would sign the bill, saying he was "with" Hong Kong but that Mr Xi was also "an incredible guy", BBC reported.
However, the bill had widespread congressional support, which meant that even if he vetoed it, lawmakers could potentially have voted to overturn his decision.
Trump also signed a second bill, which bans the export of crowd-control munitions to the police in Hong Kong - including tear gas, rubber bullets and stun guns.
"(The bills) are being enacted in the hope that leaders and representatives of China and Hong Kong will be able to amicably settle their differences, leading to long-term peace and prosperity for all," he added.
On Sunday, Hong Kong held local council elections that were seen as a barometer of public opinion towards the government and the protesters.
The elections saw a landslide victory for the pro-democracy movement, with 17 of the 18 councils now controlled by pro-democracy councillors.
( With inputs from IANS )