"Wasn't It the Bottom?" Hong Kong H-Index ELS Investors Grabbing Their Necks

Index Decline Continues, Growing Concerns Over Recovery at Maturity Instead of Early Redemption
Unpaid ELS Balance Rises from 16.98 Trillion Won Early This Year to 19 Trillion Won This Month
Experts: "China's Party Congress and November US Midterm Election Results May Cause Short-Term Volatility"

[Asia Economy Reporter Minji Lee] As the Hong Kong H Index (Hang Seng China Enterprises Index) continues to decline, concerns are growing among investors in equity-linked securities (ELS) based on this index. Many invested believing the index had already fallen as much as it could, but with the index's relentless downward trend, fears arise not only about early redemption but also whether the index will recover by maturity.

According to data from the Korea Securities Depository's securities information system, SEIBRO, as of the 13th, the outstanding balance of ELS using the Hong Kong H Index was recorded at 19.035 trillion KRW this month. The outstanding balance, which was 16.98 trillion KRW at the beginning of this year, has approached 20 trillion KRW as early redemptions have not proceeded smoothly relative to issuance volume. Although the outstanding balance can increase significantly due to a large rise in issuance volume, considering that issuance was 1.0133 trillion KRW in March and 769.8 billion KRW in April, and only about 200 billion KRW monthly thereafter, it can be analyzed that not many ELS met the early redemption conditions.

The Hong Kong H Index has fallen approximately 30.5% on an annual basis, showing a decline similar to the worst annual drop during the 2008 financial crisis (-30.9%). As a result, investors who invested in products issued in March often have not received their money back. For example, Shinhan Investment Corp.'s '22544 (Public/ELS)' issued on March 4 with a scale of 4.5 billion KRW failed early redemption at the beginning of last month because the underlying asset's valuation price did not meet the early redemption condition of being at least 95% of the lowest price. The Hong Kong H Index traded at 7,686.87 in March but plunged about 13% to the 6,670 level last month.

The panic in the Hong Kong stock market is due to multiple factors, with the economic downturn in China and Hong Kong being the most significant. China's industrial regulations and zero-COVID containment measures have severely impacted the economy, and the contraction of the real estate market has greatly weakened fundamentals. The Hong Kong H Index represents stocks issued by mainland Chinese companies but listed and traded on the Hong Kong Stock Exchange. Due to the combined domestic downturn in China, the index has fallen more sharply than the Shanghai Composite Index (-16%), which is the mainland Chinese stock market. Soo-hyun Park, a researcher at KB Securities, analyzed, "Because conditions in China are unfavorable, the capital inflow through the Stock Connect from the mainland to the Hong Kong stock market has significantly decreased. From early this year to this month, net purchases of the Hong Kong stock market through Stock Connect have dropped by more than 36%."

Other factors that could trigger further stock market declines are also piling up. Inflation is not easing as quickly as expected, and the U.S. Federal Reserve's (Fed) interest rate hike policy is expected to continue into the first quarter of next year. In Hong Kong, the benchmark interest rate was raised from 0.5% to 3.5% in line with the Fed, severely deteriorating market liquidity. Concerns are also rising over the rekindling of trade disputes between the U.S. and China. Hong Kong is a base where the ideologies of the U.S. and China clash, and if tensions between the two countries escalate, capital flight by foreigners from Hong Kong is inevitable.

Market experts argue that further declines in the Hong Kong stock market may occur in the near term. Researcher Soo-hyun Park explained, "With ongoing concerns about Fed tightening, volatility may increase in the short term due to the Chinese Party Congress and the U.S. midterm elections in November." Some experts predict the index could fall as low as the 5,000 level. Jong-gyu Jeon, a researcher at Samsung Securities, said, "The Hong Kong stock market has already undergone a preemptive price adjustment due to domestic and external factors such as economic sluggishness and tightening concerns, so additional declines may occur in the fourth quarter. However, if China's transition to a 'with-COVID' policy and recovery momentum in the economy and financial markets become visible next year, upward momentum could emerge."

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