Summary of Key Points
In the past month, the South Korean stock market has experienced a rollercoaster-like plunge: the shares of Samsung and SK Hynix, two leading chip companies, have dropped by more than 32% and 38%, respectively, causing the KOSPI index to plummet by 27% and enter a technical bear market, triggering eight circuit breakers. Behind this is the reckless use of leverage by retail investors betting on chip stocks, which led to widespread margin calls when prices collapsed. Over 1.2 million leveraged accounts fell below the required thresholds, and 320,000 to 460,000 accounts were forced to liquidate their positions. Retail investors not only lost all their principal but also ended up owing money to their brokers. Young people aged 20 to 30 accounted for 62% of the losses. To make matters worse, regulatory measures to increase margin requirements for leveraged ETFs and central bank interest rate hikes only exacerbated market panic, leading to an even more severe decline. This crisis is similar to the deleveraging process in the Chinese stock market in 2015, but due to the combined effects of regulatory measures and interest rate increases, coupled with the concentration of funds in chip stocks, the consequences have been more serious, affecting the global AI sector as well.
How Bad Was the South Korean Stock Market Plunge?
For retail investors in South Korea, this was a devastating event:
- Market Value Evaporated: In just three weeks, the total market value of South Korean stocks decreased by 1936 trillion won (about 9.3 trillion yuan), equivalent to one-third of South Korea's annual GDP.
- Leverage Margin Calls Caused Catastrophic Losses: Retail investors lost 2.15 trillion won (11 billion yuan) due to leveraged trading, with over 1.2 million receiving notices from brokers demanding additional funds, and 320,000 to 460,000 accounts being forced to liquidate. They not only lost all their savings but also ended up in debt, with many becoming creditors.
- Young People Hard Hit: 62% of the losers were young professionals and newcomers who had limited financial resources and borrowed money to invest in stocks, making them particularly vulnerable to losses. Extreme cases on social media reflect the extent of despair.
The Root Causes of the Plunge: Excessive Leverage and Concentrated Betting on Chip Stocks
The reason for the sharp decline was a deadly combination of high leverage and concentrated bets:
- Leveraged ETFs Became a Problem: South Korea allowed 2x leveraged ETFs, allowing investors to buy stocks with twice their capital. Retailers invested all their money in Samsung and SK Hynix, which accounted for a large portion of the leveraged funds in the market.
- Institutions Left First: When chip stock prices soared, foreign and institutional investors sold off their positions, leaving retail investors to bear the brunt of the losses. With 2x leverage, a 35% drop in prices triggered margin calls, with SK Hynix falling nearly 40% and Samsung 32%, exactly hitting the trigger levels.
- Lack of Diversification: All leveraged funds were invested in chip stocks, leaving no buffer against market downturns.
Regulators and the Central Bank: Intending to Calm the Market but Making Things Worse?
Regulatory actions and the central bank's decisions only exacerbated the situation:
- Increased Margin Requirements: The regulatory authorities raised the margin requirement for leveraged ETFs from 10 million won to 30 million won (about 150,000 yuan), requiring cash payments instead of stocks, and banned new leveraged products. This was intended to reduce investors' leverage, but it forced those already in debt to sell their stocks quickly, triggering a panic-driven selling spree.
- Interest Rate Hikes: The central bank raised interest rates from 2.5% to 2.75%, making borrowing more expensive for investors. Although the authorities claimed to be concerned about chip prices rather than stock market performance, the timing of the hike was particularly detrimental during a vulnerable period.
Comparing with the 2015 Chinese Stock Market Crisis:
Many compare this to the deleveraging process in the Chinese market in 2015, but South Korea's situation was more severe:
- Similarities: Both cases involved retail investors using leverage to bet on hot stocks (A股市场 focused on thematic stocks, while South Korea's was on chip stocks), with market crashes triggered by regulatory measures.
- Differences:
1. Dual Strikes: In 2015, only regulatory measures were in place, while this time there were both regulatory actions and interest rate hikes, leading to greater financial strain.
2. Lack of Diversification: While the Chinese market had a variety of sectors, South Korea's was heavily concentrated on chip stocks, leaving no room for recovery.
3. Speed of Decline: The Chinese market fell by 42% over eight months, while South Korea's plummeted by 27% in just one month.
The Impact on the Global AI Sector:
The South Korean chip market is closely linked to the global AI industry (with Samsung and SK Hynix being leaders in AI-related technologies), so the crash also affected the global AI sector. Stocks in the US and Chinese markets related to AI computing power and semiconductors fell by more than 40%.
- Short Term: Speculative funds will withdraw, and interest in AI-related stocks will cool down, leading to adjustments in their valuations.
- Long Term: The fundamentals of the AI industry remain strong, with ongoing demand for computing power and storage. Therefore, the AI sector will likely shift from a period of widespread gains to one where performance becomes the key factor for stock prices.
A Final Lesson: Don't Let Leverage Become a Trap
This crisis serves as a reminder:
- The capital market does not guarantee steady profits; speculation detached from fundamental factors always leads to crashes.
- Leverage is a double-edged sword, doubling gains and losses. Ordinary investors should be cautious when using it.
- Investment should be based on fundamental analysis and avoid following trends blindly, to prevent sudden and significant losses.
In summary, respecting the market and avoiding reckless use of leverage are crucial for protecting one's financial well-being.