Chinese stocks’ brutal start to the year is being at least partly blamed on the impact of a relatively new financial derivative known as a snowball. The products are tied to indexes, and a key feature is that when the gauges fall below built-in levels, brokerages will sell their related futures positions.
Stock declines are most pronounced in indexes to which snowballs are known to be linked, possibly revealing their impact. There’s also great uncertainty over just how many snowballs have been sold, which adds to their potential menace. More than $6 trillion has been wiped off the market value of Chinese and Hong Kong stocks since a peak in 2021, bringing key gauges closer to where snowball trigger levels may be located.
