South Korean stocks closed 1.3 percent lower Wednesday, as investors were unnerved by China's change of regulations in short-term borrowing to curb excessive leveraging, analysts said. The local currency gained ground against the U.S. dollar. 

The benchmark Korea Composite Stock Price Index (KOSPI) slid 25.39 points, or 1.29 percent to finish at 1,945.56. Trading volume was moderate at 358.9 million shares worth 3.81 trillion won (US$3.45 billion) with decliners outstripping gainers, 568 to 236. 

"It's hard to bet on a rebound of the KOSPI for now, given China's policy move. The index has already been facing a downdraft amid no clear momentum," said Kim Yong-gu, an analyst at Samsung Securities Co. 

On Tuesday, China raised the threshold for corporate debts qualifying as collateral for repurchase agreements, or repos, which are short-term loans with maturity spanning from overnight to 182 days. These are used as a key channel of short-term funding for bond investors.

Beijing's policy change prompted investors to opt for safer assets, putting an upward pressure on the yen that was coupled with a rebound for the won versus the dollar. 

But Kim noted a strong possibility of an acceleration in yen depreciation following the lower house re-election in Japan slated for Dec. 14, as the coalition led by Prime Minister Shinzo Abe is widely expected to win, which will shore up his stimulus measures. 

The yen weakness is a major drag on the local economy as it undermines the price competitiveness for Korean exporters versus Japanese rivals. 

Foreigners snapped their eight-day buying binge and opted to scale down their holdings in Seoul shares worth a net 151.9 billion won, reflecting downbeat investor sentiment. 

Retail investors, in contrast, scooped up shares worth a net 108.6 billion won as they hunted for a bargain. 

Shares fell across the board, driven by losses in insurance and chemical companies. Samsung Life Insurance, No. 1 in the industry, slumped 4.37 percent to 120,500 won, with LG Chem tumbling 4.8 percent to 188,500 won. 

Shares of Daum Kakao Corp., the operator of the top messaging app KakaoTalk, plunged 4.69 percent to 128,000 won following media reports that its co-head, Lee Sirgoo, was called in by police for questioning on suspicions of mismanagement with obscene content distributed via the app. 

The local currency ended at 1,102.20 won against the greenback, up 5.6 won from Tuesday's close. (Yonhap)