China's brokers sold $50B of 'snowball' bonds — then had to dump futures to hedge them

Snowball products are structured derivatives Chinese brokerages sold heavily to retail and wealthy investors from 2021 onward: buy in, and as long as a reference index like the CSI 500 or CSI 1000 stays within a set range, the product pays a bond-like coupon of around 10% a year. If the index falls through a preset 'knock-in' barrier, typically 70–80% of the starting level, the payout flips and the holder can lose most of their principal. Cinda Securities put the outstanding notional at 216 billion yuan (about $30B) in January 2024; UBS later estimated it nearer $50B.

China's small-cap indices fell hard in early 2024, and by late January roughly 40% of outstanding snowball products had breached their knock-in levels. Brokerages that sold the products hedged their exposure by holding long positions in CSI 500 and CSI 1000 stock index futures; as knock-ins triggered, they had to sell those futures to unwind the hedge, adding forced selling into an already falling market. Futures turnover on CSI 1000 contracts spiked to 93 billion yuan in a single day, against a prior monthly average of about 13 billion yuan.

A product marketed as steady income in a flat market became, at scale, an amplifier of the crash it was meant to protect against — each leg of forced hedge-unwinding pushed the index closer to the next batch of barriers. Bank of America estimated a further 6–7% decline would trigger another wave. Beijing intervened with market-support measures in the following weeks, but investors who bought snowballs at 2023 levels needed a roughly 40% index recovery within a year to avoid losing principal.