Investors brace for losses from China-tied notes

The recent stock market rout in China has been roiling the global market, but Korean investors who bought China-tied investment products could be hit hardest by the recent turbulence, market watchers said Friday.

The issuance of equity-linked securities designed to track the Hong Kong Stock Exchange's Hang Seng China Enterprises index came to 46.34 trillion won ($38.34 billion) at the end of last year, accounting for some 60 percent of all ELS products sold here in 2015, according to data by the Korea Securities Depository Corp.

An ELS is structured to track the performance of underlying assets such as an individual stock and an index, not guaranteeing the principle as investors prefer instruments that promise higher yields.

In the first half of last year, the HSCEI index, which follows the performance of Chinese firms based in the mainland and listed on the Hong Kong bourse, hovered above 14,000 points on the back of China's market rally.

It subsequently spawned many ELS products in South Korea tracking the Hong Kong index and drew a large number of investors who opted to indirectly buy stocks while the interest rate was low.

With lingering concerns over China's economic slowdown and global uncertainties, however, the index has been on a downward spiral since the second half of last year, closing at 8,459.63 points on Wednesday.

The market rout triggered a "knock-in option" for some ELS products, meaning that investors could lose principal if underlying equities fall below a pre-determined price before maturity.

As of Wednesday, 144 ELS products fell below the knock-in barrier, with combined deposits coming to around 150.9 billion, according to market researcher FN Guide.

"If the Hong Kong index slides below 7,000, investors are feared to suffer losses of at least 8 trillion won," said NH Investment & Securities expert Choi Chang-kyu. (Yonhap)