Can China’s stimulus reduce investors’ woes?
The Hong Kong stock market’s rise following efforts by the Chinese government to stimulate its bourse has brought relief to some Korean investors, decreasing their losses from equity-linked securities (ELS) tied to the performance of the Hang Seng China Enterprises Index (HSCEI) by approximately 300 billion won ($224 million).
However, despite this positive development, there is a prevailing sentiment in the market that the impact of China’s measures to boost the stock market will be only temporary. The total losses from ELS still amount to several trillion won.
Over the past few days, the Chinese government has injected a significant amount of liquidity into the stock market to counteract slumps. This initiative includes the deployment of a market stabilization fund valued at 2 trillion yuan ($278 billion) and the introduction of market capitalization management as a key performance indicator for stateowned enterprises.
Following these measures, both China’s and Hong Kong’s stock markets experienced immediate rebounds. Notably, the problematic HSCEI, which had fallen to 5,001.95 on Jan. 22, began to show signs of recovery. As of Monday, it was fluctuating within the 5,400-5,450 range.
According to the Financial Supervisory Service (FSS), the value of HSCEI-tied ELS set to mature between February and June is estimated at 7.7 trillion won. On Jan 22, at the lowest point of the index, these securities faced losses totaling 4.2 trillion won. However, a subsequent rebound in the index led to a reduction in these losses to 3.9 trillion won. Some investors who owned products scheduled to mature after July have even narrowly avoided the risk of losses.
Despite numerous stimulus efforts, the stock market’s outlook remains dim, causing concerns among Korean investors. The main reasons for this pessimism are the increasing worries about a slowdown in China’s economic growth and the absence of effective strategies to attract capital inflow.
Additionally, on Monday, the Hong Kong High Court ordered the liquidation of the Chinese real estate giant Evergrande, burdened with debts exceeding $300 billion. This decision is expected to negatively affect the Hong Kong stock market further.
“The news of the authorities injecting 2 trillion yuan in emergency funds, along with a reduction of 50 basis points in the reserve requirement ratio in February, is expected to prevent any immediate further declines in the stock market,” Baek Eun-bi, an economist at Eugene Investment, noted. “However, the crucial factor for achieving a sustained uptrend in stock prices lies in the revitalization of market confidence and a rebound in the real economy.”
Should the HSCEI remain stabilized around the 5,300 level, estimated principal losses in the first half of the year could reach between 5 trillion won and 6 trillion won. From Jan. 8 to Friday, the cumulative losses concerning maturity for HSCEI-tied ELS products sold by four major banks have been tallied at 312.1 billion won.
During a regular National Policy Committee meeting on Monday, FSS Governor Lee Bok-hyun said that the financial watchdog is “under intense investigation” regarding the issue, and is actively considering improvements to the system.
The crucial factor for achieving a sustained uptrend in stock prices lies in the revitalization of market confidence.