Summary of Key Points
The South Korean stock market has recently experienced severe turmoil due to the bursting of a bubble in the AI-driven semiconductor sector. Retail investors, who had heavily leveraged their positions in high-tech stocks, took on the brunt of the fallout as foreign and institutional investors withdrew en masse. As a result, over 1.2 million accounts were required to deposit additional margin, and more than 300,000 accounts were forced to liquidate their holdings (meaning that one in every 30 working Koreans received a notice to replenish their margin). Although regulatory authorities and the central bank took action (suspending the issuance of new leveraged ETFs and raising interest rates), it was already too late to stop the market crash. Funds are now flowing from South Korean tech stocks to Chinese tech sectors, which are valued more reasonably.
Detailed Analysis
1. One in Every 30 Workers Receives a Margin Call: South Korean Retail Investors' Leverage Has Completely Collapsed
Many South Korean retail investors use leveraged accounts to trade stocks. When stock prices fall significantly, brokers notify them to replenish their margin; if they fail to do so, their positions are sold to cover the debt (forced liquidation).
- Chilling Statistics: As of July 13, over 1.2 million retail investor accounts received margin calls, and 320,000 to 360,000 accounts were forced to liquidate. With South Korea having approximately 35.7 million working-age individuals, this means that one in every 30 people faced the need to pay additional funds.
- Dramatic Drop in Margin Balances: Retail investors have lost a total of 30 trillion Korean won (about 150 billion yuan) due to stock price declines, reaching the lowest level since February this year. This indicates that either they are unable to afford the additional payments or are too scared to borrow more money.
2. Foreign and Institutional Investors Have Fled, While Retail Investors Tried to Buy at Low Prices—Only to Become the New Buyers
Foreign and institutional investors had already identified the risks and withdrew their funds. Retail investors, however, believed that low prices represented an opportunity and bought aggressively, effectively taking on all the selling pressure.
- Outflow of Funds: Foreign investors sold $1 billion worth of South Korean tech stocks, and domestic institutions sold $1.6 billion, with ETFs (baskets of stocks) accounting for the majority of institutional sales (46%).
- Retail Investors as the New Buyers: Retail investors purchased $2.6 billion worth of tech stocks, effectively absorbing all the selling pressure from foreign and institutional investors. It’s like everyone else is running away from a fire, but you decide to charge in, only to get trapped in its aftermath.
3. Regulatory and Central Bank Actions Came Too Late
The South Korean AI semiconductor market was like a car traveling at high speed; it only came to a stop after hitting a wall.
- Regulatory Measures: On Thursday, new regulations were introduced: the issuance of new leveraged ETFs on individual stocks was suspended, and promotional activities for these products were prohibited. The entry fee for new investors was increased from $10,000 to $20,000.
- Interest Rate Hike: The central bank raised interest rates by 25 basis points (to 2.75%), the first time in three years. Higher interest rates make borrowing more expensive and further depress tech stock prices.
- Why Too Late?: Semiconductor stocks had risen excessively earlier this year—Samsung’s value doubled, and SK Hynix’ increased by two times. Leveraged ETFs amplified these gains and losses. By the time regulators intervened, the market was already on a trajectory toward collapse.
4. Where Are the Funds Going Next? Chinese Tech Stocks Become the New Target
Capital has not abandoned the tech sector; it’s just shifting to other markets.
- Insider Views: Institutions such as UBS and Franklin Templeton believe that investors are moving from South Korean to Chinese tech stocks, which are valued more reasonably. They note that Chinese tech stocks did not experience as dramatic price increases, and retail investors there do not use as much leverage.
- Logical Reasoning: This shift is also driven by the relative safety of Chinese markets. For example, while South Korean storage chip stocks were declining, Chinese tech stocks were rising, creating a counterbalancing effect.
5. The Root Causes of the Bubble: Leverage and Excessive Concentration in AI Semiconductors
This crisis was not accidental:
- Excessive Concentration: Samsung and SK Hynix account for half of the South Korean stock market’s total value. Any decline in their performance causes the entire market to plummet.
- Leverage: Retail investors used leveraged ETFs, which amplify both gains and losses. While this can lead to substantial profits during rises, it also results in rapid losses during declines. When forced liquidations occur, brokers sell stocks regardless of their actual value, exacerbating the downward trend.
- Broken Expectations: Investors had been betting on continued growth in semiconductor profits, the weak Korean won supporting exports, and retail investors always being willing to buy. Once these assumptions were proven wrong, the bubble burst.
In One Sentence
South Korean retail investors, who leveraged their positions in AI-driven semiconductor stocks, became the victims of a market crash triggered by regulatory actions and interest rate hikes. Funds have since shifted to Chinese tech stocks, highlighting the high risks associated with leveraging for stock trading. This bubble’s collapse serves as a reminder: borrowing money to invest in stocks carries significant risks, and one must be cautious when chasing high returns.