An investor looks at screens showing stock market movements at a securities company in Beijing on Jan. 5. (AFP-Yonhap)

A day after Chinese stocks plunged over 7 percent, Korean market erased early losses to trade positively, while the benchmark Korea Composite Stock Price Index closed 0.61 percent higher at 1,930.53, although the Shanghai Composite Index closed down 0.26 percent at 3,287.7. The won retreated to 1188 won against the dollar, down 0.3 won.

The Chinese stock market had its worst-ever start to the year as it halted trading on the Shanghai and Shenzhen stock exchanges to prevent steeper falls after shares sank 7 percent Monday due to concerns over its weak factory data.

Stung by the losses, the KOSPI plunged more than 2 percent to a four-month low, with the Korean currency sinking to its lowest level against the greenback in more than three months Monday.

Korea’s government and central bank officials said Tuesday that China’s stock plunge on the first trading day of 2016 has a limited impact on its domestic financial market while raising concerns over uncertainty in the global financial markets.

”The volatility of the global financial market is expected to continue as the Chinese stock market dive and tensions in the Middle East add uncertainty,“ Finance Minister Choi Kyung-hwan said.

Choi Hee-nam, the deputy finance minister of international affairs who held an emergency meeting early Tuesday morning, said the Korean stock market would quickly recover stability.

Choi said the Shanghai Composite Index free fall was not a reflection of the fundamentals of the Chinese economy as a technical issue, adding investors overreacted to a circuit breaker system introduced to the Chinese market for the first time. A circuit breaker is a mechanism that can suspend trading if stocks fall sharply.

“China showed weak manufacturing data, but other economic data wasn’t in bad shape. The plunge seemed to be caused by technical issues, such as the first introduction of the ‘circuit breaker’ mechanism,” he said.

He added that increased tensions between Saudi Arabia and Iran has applied more selling pressure on the Chinese stock market by fueling risk-averse sentiment among investors.

The Bank of Korea, which also held a meeting Tuesday, downplayed the impact of the China rout while vowing that local authorities would continue to monitor the situation.

“It is expected to have a milder impact on the Korean economy than last year’s equity meltdown,” a BOK official said, referring to a huge plunge in Chinese stock prices in June that rattled global markets when the Shanghai Composite sank nearly 40 percent and trillions of dollars were wiped off valuations.

Some experts pointed out that the slide in the yuan and the looming expiration of the Chinese government’s measures to curb last year’s share slump could encourage sell-offs in the coming days. A six-month ban on share sales that tied up an estimated $185 billion of Chinese stocks is set to expire on Jan. 8.

“A falling yuan is the biggest risk for the Chinese stock market in the first half of this year, but the Chinese government is expected to respond swiftly as the country’s central bank has been emphasizing the yuan stability since last year,” Samsung Securities researcher Chun Jong-kyu said.

By Park Han-na  (hnpark@heraldcorp.com)