Hong Kong H Index Continues to Fall... Anxious ELS Investors

Impact of Chinese Big Tech and Real Estate Regulations
Index Plummets About 16% Since Early Year

Early Repayment This Month Only 88.2 Billion
Just 7% of Issuance Six Months Ago

[Image source=Reuters Yonhap News]

As the Hong Kong H Index (Hang Seng China Enterprises Index) declined due to concerns over the Chinese government's regulation of big tech companies, equity-linked securities (ELS) based on this index have been failing early redemption one after another.

According to the financial investment industry on the 16th, the Hong Kong H Index has plummeted about 16% from 10,722.29 at the beginning of this year to 8,936.53 as of the day before. The Hong Kong H Index is an index of stocks issued by mainland Chinese companies but listed and traded on the Hong Kong Stock Exchange. The top market capitalization stocks composing the index include Tencent Holdings, Alibaba Group Holdings, Xiaomi, Meituan, and other tech stocks sensitive to the Chinese government's big tech regulations. The index fell to a yearly low (8,644.64) on the 20th of last month due to concerns over the Chinese government's big tech industry regulations, then seemed to recover, but is now heading toward another low amid regulatory uncertainties and concerns over the earnings slowdown of related companies.

ELS are products that pay a contracted yield if domestic or foreign stock indices or specific company stock prices move within a range set by the securities company. Typically, they have a maturity of 2 to 3 years, and if early redemption conditions are met through the first interim evaluation after 3 to 6 months, investors can receive the contracted returns and principal. Although conditions vary for each ELS, the structure is such that redemption occurs if all underlying indices tracked by the ELS move within 80% to 95% of the initial reference price.

According to the securities information system SaveRo, the total amount of ELS based on the Hong Kong H Index that were early redeemed from the beginning of this month until the day before was 88.2 billion KRW (11 cases). Among these, only 74.9 billion KRW worth of ELS issued six months ago have been fully redeemed. Considering that the outstanding balance of index-type ELS (184 cases) issued based on the Hong Kong H Index from March 1 to 15, six months ago, was 999.8 billion KRW, only 7% of the total issuance volume succeeded in early redemption.

The redeemed products had more relaxed conditions, with the first evaluation date's reference being about 80% of the reference price, compared to the remaining ELS (95%) that were not redeemed. Considering that the Hong Kong H Index fluctuated around 10,110 in March, the current Hong Kong H Index, which has decreased by about 15% from that level, cannot meet the redemption conditions. Since many investors tend to invest with early redemption in mind for ELS, if redemption does not proceed smoothly, there is a possibility that market sentiment could weaken.

Experts say that early redemption may be delayed until next month as long as regulatory uncertainties persist. Suhyun Park, a researcher at KB Securities, said, "By the fourth quarter, additional enforcement decrees for three regulatory laws on platform companies ? the Antitrust Law, the Personal Information Protection Law, and the Data Security Law ? are expected to be announced," adding, "Yesterday, regulatory proposals related to real estate and casino companies were also announced, further increasing the decline in the Hong Kong H Index, which has a high proportion of related companies."

This content was produced with the assistance of AI translation services.