China-backed firms prove risky

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China-backed firms prove risky

The nation’s sole stock market operator, the Korea Exchange (KRX), advised caution when investing in small and midsize Korean firms whose share values suddenly spiked after news broke that they were expanding their businesses in China or partnering with Chinese investors or companies.

The KRX on Thursday said last year, nearly 43 percent of companies that were either kicked off the benchmark Kospi, the tech-heavy Kosdaq or are currently under review as candidates for being delisted had either repeatedly changed their expansion plans in China or its investment agreements with Chinese businesses.

Among the 11 companies delisted last year, one was traded on the Kospi while the rest were traded on the Kosdaq. Many were specializing in cosmetics, duty-free shops and games, industries that are considered attractive.

Unlike other major industries that are traditionally popular among investors such as shipbuilding and automobiles, these areas have recently been enjoying increases in their exports, especially thanks to rising popularity in China. On the contrary, traditional stronghold sectors have seen their earnings falling and debts growing.

According to the KRX, investors who bought shares of these companies after news reports of their business expansion or investments from China suffered losses due to stock fluctuations. Some of the companies’ stocks spiked as much as 92 percent from an annual low to annual high after their business plans were announced. Soon after, many of these companies experienced a sharp fall when Chinese investors delayed their investments.

On average, after such announcements have been made and failed, share values plummet by 70 percent.

Another cause of these sharp fluctuations in stock values was that major shareholders of some of the companies under review by the KRX actually sold their shares right before the company announced its business insolvency.

“Local investors should especially pay attention when purchasing stocks of companies whose business portion with China is big,” the KRX warned, “because those business collaborations or investment promises oftentimes end up being scrapped.”


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