Korean exodus from China funds amid deepening property crisis  

South Korean investors’ retreat from Chinese equity funds of nearly 10 trillion won ($7.5 billion) in total principal is accelerating amid deepening concerns about the world’s second-largest economy due to its escalating property crisis.

According to the investment and financial industries on Wednesday, 197 funds investing in China’s blue-chip stocks in Korea lost 427.7 billion won in the last month.

The capital flight from Chinese equity funds has recently been picking up speed with daily redemptions of 20 to 30 billion won.

The yield on Chinese funds recorded minus 11.8% in the January-August period this year, underperforming US funds’ 33.6% return and even Russia’s 13.1% over the same period.

Chinese funds' one-year yield was marked minus 26.4% and the two-year yield was recorded as minus 37.8%.

The big losses in Chinese funds stem from the H-Share Index or Hang Seng China Enterprises Index’s 8.9% drop this year due to the extended slump in Chinese stocks on growing concerns about the country's real estate crisis-driven economic downturn.

CHINA WOES

China’s top three real estate developers, including the country’s largest property developer by revenue Country Garden, are facing risk of default. Evergrande has already filed for Chapter 15 bankruptcy protection in New York.

Their financial difficulties are set to send shock waves through China’s economy, heavily depending on real estate and infrastructure development, and beyond, triggering Korean investors’ exodus from Chinese stocks.

JP Morgan slashed its China economic growth forecast for this year to 4.8% from its previous projection of 6.4% after the release of the country’s weak growth data in both production and consumption. Other global investment banks also revised downward their forecast of China’s gross domestic product (GDP) to the high 4% range.

“It is better to keep a wait-and-see mode until September or October due to the mounting uncertainty about the Chinese economy,” said Kim Kyung-hwan, the head of China and emerging country strategy at Hana Securities Co., formerly Hana Financial Investment Co.

EXTENDED SELLING SPREE 

The total investment in Chinese funds in Korea is estimated at 9.5 trillion won, the second largest after that of US funds estimated at 10.6 trillion won.

The most popular Chinese fund in Korea is the Mirae Asset TIGER China Electric Vehicle Solactive exchange-traded fund (ETF) due to high expectations for Chinese electric vehicles.

As of June of last year, the fund’s net asset value (NAV) topped 4 trillion won but its investors are now facing a risk of massive losses due to the poor performance of Chinese EV stocks since then. Its one-year return is minus 44.07%, and its NAV plunged to 2.5 trillion won.

Investors of KB China Mainland A Shares fund by KB Asset Management Co. also see a fall of 17.94% in returns over a year, while the yield on KODEX China H Leverage (H) by Samsung Asset Management Co. also recorded minus 31.76%.

The outstanding balance of equity-linked securities (ELS) linked to HSCEI due to mature in six months is about 4 trillion won. But most HSCEI ELS investors are also expected to lose their principal given that the H-Share Index has halved from 2021’s peak.

ELS are derivative products the returns of which are determined based on the performance of underlying assets, such as those in an index or individual stocks. ELS investors can enjoy returns from their issuers when the underlying asset’s price remains above a certain level, or knock-in level, until maturity.

Investors’ selling spree of Chinese equities is a worldwide phenomenon, underscoring growing concerns about the Chinese economy.

Bloomberg reported that global funds net sold $9.3 billion worth of China’s blue-chip stocks for 12 straight sessions until Aug. 22.

As investors are disappointed by Beijing’s timid stimulus measures, including a rate cut to shore up its economy, Koreans could rush to redeem more Chinese funds.

Write to Man-Su Choe and Jihyo Lee at bebop@hankyung.com

Sookyung Seo edited this article.