SHANGHAISINGAPORE, Jan 23 Reuters China39;s plunging stock market is leading to losses on billions of dollars worth of derivatives linked to the country39;s equity indexes, forcing a vicious cycle of selling in stocks and futures contracts as market participants manage their risks.

Stock markets in Hong Kong and in mainland China plunged on Monday, extending a long spell of weakness driven by an exit of foreign investors alarmed by China39;s wobbly economy and a lack of stimulus measures.

Share prices stabilised somewhat on Tuesday after authorities announced plans to support the market, but analysts were hesitant to cheer.

The smallcap CSI1000 index has traded below the 5,000 level this week, after a 6 plunge on Monday to its lowest level in nearly four years.

Market participants said the drop triggered knockin levels on snowball products, also known as autocallables in some markets, leading to forced selling of stock futures contracts which further pressured the market.

There is a wave of retail structured products termed snowballs that are reaching their knockin levels, i.e. where they stop out, said Jon Withaar, who manages an Asia special situations hedge fund at Pictet Asset Management.

The spike in futures trading volumes showed these products had been hedged via stock futures, he said.

Snowballs are derivatives in which investors receive a bondlike coupon if the underlying assets, such as the CSI500 and CSI1000 indexes, do not hit a predetermined knockin…