Kospi can’t shake off its fear about China

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Kospi can’t shake off its fear about China

It’s been a week since the South Korean market tumbled after a circuit breaker closed the Chinese stock market on the first day of trading for the year - spreading fear of weaker Chinese growth worldwide.

The gloom on the Korean markets has yet to be dispelled.

On Monday, Seoul’s benchmark Kospi failed to defend a 1,900-plateau with worries about the Chinese economy continuing to haunt investors. Rising tension with North Korea only made things worse.

In fact, the Kospi reversed Friday’s mild recovery of 0.7 percent to start the day on a weak foot. During trading Monday, it fell as much as 24.58 points, or nearly 1.3 percent. It closed the day 22.78 points or 1.19 percent lower than on Friday.

The Chinese Shanghai Composite index and the Shenzhen Composite index didn’t do too well either as they dropped 5.33 percent and 6.21 percent, dragging down neighboring stock markets including Japan’s Nikkei, which dipped 0.39 percent, while the Hong Kong and Taiwanese markets lost 2.43 percent and 1.33 percent each.

Since the first day of this year, the Kospi has lost more than 3 percent compared to the last day of 2015. The selling spree of foreign investors that has continued for the 26th consecutive trading day only made things worse. Foreigners have sold nearly 4 trillion won ($3.3 billion) worth of stock since early December.

As a result, the Korean won depreciated to its lowest level in five years. The won closed at 1,210 against the greenback. The last time the won was this low was in July 2010 when it was trading at 1,215.6 against the greenback.

The biggest question floating around in the stock market is “How long will this last?”

Experts say it may not last long.

“Uncertainties in the Chinese market are caused by psychological worries among investors rather than the poor economic data from the country,” said Chung Seung-jae, an analyst at Mirae Asset Financial Group.

“A weakened yuan pulled down the won, which led the Kospi to fall,” said Park Sung-hyun, an analyst at Samsung Securities. “However, this trend will not necessarily last that long since foreign investors tend to buy more local stocks when the currency drops.”

In fact foreign investors bought an average of about 140 billion won worth of shares a day when the won was trading at 1,200 to 1,250 a dollar during the last five years, according to data compiled by Samsung Securities.

When the currency falls between 1,250 and 1,300 against the greenback, foreign investors bought near 160 billion won worth of stocks a day. They withdrew from the market when the currency was trading between the 1,150 and 1,200 level, and only bought about 40 billion won worth of stocks when it was between the 1,100 and 1,150 level.

“The won might soon be depreciated to as low as 1,216 against the greenback,” said Chung Kyung-pal, a strategist at Hana Futures.

The Korea Center for International Finance, however, warned that recurring uncertainties about China could translate into damage to the real economy.

BY KIM YOUNG-NAM [kim.youngnam@joongang.co.kr]

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