Chinese retail investors who loaded up on derivatives that rely on calm market conditions have been hit with heavy losses, further undermining confidence in the country’s sputtering equity market, reports the Financial Times. So-called snowballs, which promise a stream of sizeable interest payments as long as stock indices trade within a certain range, have grown to an estimated RMB 320 billion ($45 billion) market in China.
Brokerages and private wealth managers increased sales of such derivatives—named because of the steady returns they can accumulate for holders—in 2021, touting the higher yields on offer at a time when equity markets were relatively placid.
But a protracted stock rout since late 2023 has led to indices breaching a lower limit embedded in the contracts, triggering so-called knock-ins that leave many holders facing substantial losses on their original investment unless stocks rebound.