South Koreans with money in equity-linked securities (ELS) products that track Hong Kong’s Hang Seng China Enterprises Index (HSCEI) have turned panicky amid renewed economic and political uncertainties in the financial hub due to head-on clash between Beijing and Washington.

The outstanding balance in HSCEI-based ELS amounted to 28.85 trillion won ($23.5 billion) as of Sunday, according to the Korea Securities Depository, gaining three months in a row due to postponed redemptions amid the market plunge. About 70 percent of ELS products issued in the first half of 2019 have tracked the Hong Kong index.

Investors can lose money if the index slips further upon the threat to the autonomous identity of the city after Beijing’s single-party congress passed a draft bill on Hong Kong security, enabling security forces from the mainland to operate in Hong Kong and Beijing meddling in freedom of press, expression and assembly.

Due to ‘knock-in’ option, investors can’t get back full principal if the underlying asset dips below a certain threshold and fails to recover to a pre-set level before expiry dates.

Most of the HSCEI-tracking vehicles have a knock-in level at 45 percent to 65 percent of the initial reference price, with 50 percent accounting for the largest share, followed by 65 percent and 60 percent.

The HSCEI shed 15.6 percent from the beginning of the year to 9,561.03 as of last Friday. Market analysts found if the index falls below 7,000, many of the ELS products would breach the knock-in level.

The index remains still well above the 9,000 level and has not dipped below 7,000 since the global financial crisis in 2008. But investors fret that the Hong Kong market could be deteriorated in the long run as the conflict between the U.S. and China over Hong Kong is worsening on top of the coronavirus pandemic.

The Hong Kong index plummeted to around 7,500 in February 2016 from over 14,000 in April 2015, leading most of the ELS products to breach the knock-in threshold. But it soon rebounded to above 13,000, allowing investors to receive full principal plus interest rate at maturity, according to an official from a securities firm.

By Hong Hye-jin and Choi Mira

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