Summary of Key Points
This year, the South Korean stock market has experienced a dramatic turnaround, from a period of rapid growth to a bear market. The benchmark KOSPI index rose by 116% from the beginning of the year to June, reaching a record high, only to plummet later on. As of July 16, it had fallen by 25%, officially entering a bear market. A large number of retail investors used margin trading and leveraged single-stock ETFs to increase their exposure to the market, resulting in heavy losses during the crash. From May to July 14, forced liquidations amounted to 2.3 trillion Korean won (approximately 10.4 billion yuan). The South Korean president personally intervened, and regulatory authorities banned the issuance of new leveraged single-stock ETFs and raised the required margin levels, initiating a process of passive deleveraging.
I. The South Korean Stock Market: A Wild Ride from Record Highs to Bear Market
The South Korean stock market was a global star in the first half of the year, with the KOSPI index soaring by 116% by June 22. However, the situation turned dramatic in June:
- On July 13, the KOSPI fell by 8.95% in one day, breaking below the 7,000-point mark;
- On July 15, it rebounded sharply by 6.24%, returning to above 7,000 points;
- On July 16, it fell another 6.37%, dropping to 6,820 points and officially entering a “technical bear market” (a decline of more than 20% from its peak).
These extreme fluctuations left the exchange in a state of chaos: 36 temporary suspensions were issued this year, and seven market-wide circuit breakers were triggered, accounting for more than half of the total number in the past 2,000 years (with a total of 13 occurrences). The volatility index increased by 281.8% compared to December last year, reflecting market sentiment that was as volatile as a roller coaster ride.
II. Leverage: A Double-Edged Sword
Many retail investors used leverage to try to quickly become wealthy through margin trading and leveraged single-stock ETFs. However, when the market declined, their losses were devastating:
- Wedding Funds Lost: A 39-year-old employee invested 80 million Korean won (about 360,000 yuan) in semiconductor stocks and leveraged ETFs, resulting in a floating loss of 18 million Korean won (about 80,000 yuan), potentially delaying his wedding.
- Triple Losses with Double Leverage: A 31-year-old investor bought SK Hynix products with double leverage; a 1% drop in the stock price caused him to lose two-thirds of his investment, leading to insomnia at night.
- Margin Trading Dreams Gone: A 24-year-old college student leveraging 10–20 million Korean won (about 1.36 million yuan) almost lost all his funds during a market correction.
Why were the losses so severe? Leveraged ETFs have a “rebalancing” mechanism that increases positions when prices rise and reduces them when prices fall, exacerbating losses during declines. For example, investors in SK Hynix’s leveraged ETFs held 4.73 trillion Korean won in assets, but continued to buy even as the stock price dropped by 28%, only starting to sell recently.
III. Why Do Investors Use Leverage?
Researcher Wu Qicong from Renmin University of China identified three main reasons:
1. Wealth Anxiety: Young South Koreans, facing high housing costs, education expenses, and pension needs, seek high-risk investments to change their fortunes overnight.
2. Policy Encouragement: The government allowed the issuance of leveraged single-stock ETFs and encouraged capital to flow back into the stock market.
3. Easy Access to Finance: Trading is accessible via mobile devices, and the threshold for margin trading is low (a minimum initial deposit of 40%, meaning you only need to provide 40% of the investment amount to borrow the remaining 60%, with a leverage ratio of 2.5).
These factors combined led many investors to take risky bets.
IV. Regulators Step in: President’s Intervention and New Regulations
Faced with severe market declines, South Korean President Lee Jae-myeon directly addressed the issue, ordering regulators to address the situation promptly. On July 16, the Financial Services Commission introduced new measures:
- Banning the issuance of new leveraged products.
- Raising the minimum margin requirement from 10 million Korean won to 30 million Korean won (about 136,000 yuan), with cash-only payments required as margin.
- Limiting each trade on a single stock to a maximum of 20 shares.
Regulators adopted a gradual approach rather than a sudden ban, similar to the time it took to regulate other products, to avoid further market disruption.
V. What’s Next? Deleveraging Is Just Beginning; Fundamental Factors Are Key
The deleveraging process is still ongoing:
- The balance of margin loans has decreased by 17.7 billion yuan, but forced liquidations continue, indicating that the root causes of leverage are not yet completely addressed.
- In the long term, the performance of the South Korean stock market will depend on the fundamentals of industries such as semiconductors (e.g., Samsung and SK Hynix). Leverage is merely a short-term factor affecting market volatility.
- Could there be broader impacts? While the situation could affect global memory chip companies (such as Micron and Sandisk), a South Korean market crash alone is unlikely to trigger a global stock market crisis, unless it coincides with other factors like a cooling in AI investment, fund redemptions, or exchange rate pressures.
In summary, the market is still dealing with the consequences of excessive leverage. Retail investors should avoid taking on additional risk and wait for fundamental conditions to stabilize before making further investments.
(Note: The above analysis is for reference only and does not constitute investment advice. The stock market carries risks, and investors should proceed with caution.)