KOSPI Surges 20% Then Drops 5% Amid South Korea's Market Turmoil

Original | Odaily Planet Daily (@OdailyChina)

Author | Wenser (@wenser 2010 ) After a violent rebound of about 20% last Friday, South Korea’s KOSPI index closed down 5% today at 6,257 points.

Meanwhile, various changes facing the Korean stock market are gradually coming to light: on one hand, the number of liquidated accounts has surpassed the 500,000 mark; on the other, over 24 trillion Korean won has flowed back into banks as a risk-aversion move. Against the backdrop of President Yoon Suk Yeol’s approval rating hitting a new low and frequent interventions by South Korea’s financial regulators, the next direction of the Korean stock market has become a focal point for Korean investors and global capital markets alike. After all, South Korea is home to two of the semiconductor industry giants fueled by the AI boom.

Is the stock market continuing to bleed and decline, or will regulatory intervention bring positive stimulus? At least for now, South Korea’s market downturn is far from over.

In our previous article, “Korean Stocks Hit Circuit Breakers Seven Times This Year: The Summer When Leverage Destroyed Young Investors,” we used the real-life stories of several Korean investors to reveal the brutal market plunge that unfolded in the Korean stock market this summer.

After nearly two weeks of continuous decline with occasional rebounds, various data indicate that the Korean stock market is currently experiencing sustained outflows: on one hand, retail investors are being liquidated due to insufficient capital; on the other hand, there is a reduction in investment deposit volumes alongside an increase in bank savings.

Goldman Sachs data: Over 500,000 South Korean leveraged retail accounts may have been fully liquidated

On July 30, the prominent financial account The Kobeissi Letter on X posted that, according to Goldman Sachs data, as of July 13, over 1.2 million leveraged retail trading accounts in South Korea received margin calls, with an estimated 320,000 to 360,000 accounts fully liquidated, accounting for approximately 3.4% of South Korea’s adult population (Odaily Planet Daily note: equivalent to 1 in every 30 South Korean adults potentially facing liquidation). With the Korea Composite Stock Price Index (KOSPI) having declined by approximately 18% since July 13, the number of accounts already fully liquidated is now estimated to exceed 500,000.

Despite the violent rebound of the Korean KOSPI index and individual stocks such as Samsung and SK Hynix on July 31, countless liquidated accounts have become dust in the history of the Korean stock market.

Korean stocks: Over 24 trillion won flows into fixed deposits at the five major banks

Due to adjustments in the semiconductor sector and stricter regulation of leveraged investments, funds awaiting investment have rapidly withdrawn from the Korean stock market, resulting in a "reverse fund migration" phenomenon.

Data shows that as of the end of July, the total term deposit balances of South Korea’s five major banks—KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup—reached 973.49 trillion KRW, an increase of 24.09 trillion KRW from the previous month, marking the largest monthly increase this year.

Surrounding market funds have also significantly contracted. According to data from the Korea Financial Investment Association, investor securities account deposits (funds held for stock trading) reached a historical high of 139.69 trillion KRW on June 4, but had declined to 107.20 trillion KRW by July 28, a reduction of over 32 trillion KRW in less than two months. Meanwhile, the margin loan balance, which reflects the scale of margin trading in the market, fell to 33.19 trillion KRW during the same period, down by approximately 4.5 trillion KRW from the peak of 37.72 trillion KRW recorded on July 2, representing a decline of about 12%.

Korean stock volatility scares investors: Deposits by investors drop by over 35 trillion KRW in two months

Affected by significant volatility in the Korean stock index, in July, the average daily deposit size by investors (Odaily Planet Daily note: Investor deposits refer to funds deposited by investors into brokerage accounts for stock purchases; here, it represents daily average statistics) dropped by nearly 20 trillion Korean won compared to the previous month. This level is approximately 10 trillion Korean won lower than in March this year (Odaily note: At that time, the KOSPI index experienced a sharp correction due to tensions between the U.S. and Iran).

According to data released by the Korea Financial Investment Association on August 3, investor deposits stood at 104.6584 trillion Korean won as of the previous month’s 30th, the day the KOSPI index hit a阶段性 low. This represents a decline of over 35 trillion Korean won in just about two months from the historic high of 139.6948 trillion Korean won recorded on June 4.

Considering previously mentioned factors such as 85% of household loan quotas being utilized in the first half of the year and the Bank of Korea’s interest rate hikes, liquidity in the Korean stock market is expected to face further short-term tightening.

South Korea's "bloody July" in the stock market has forced financial regulators to seek various measures to mitigate extreme market volatility and high leverage pressures. Specifically, the Financial Services Commission and the Financial Supervisory Service are collaborating to influence the market through legislative actions and by raising margin requirements for leveraged trading.

South Korea's Financial Services Commission may be granted "emergency intervention powers": to limit leverage multiples of ETFs and set investment caps.

The Financial Services Commission (FSC) of South Korea, in collaboration with the Financial Supervisory Service (FSS), has initiated amendments to the Capital Markets Act, targeting single-stock leveraged ETFs that were deemed to have amplified volatility during the recent market plunge. Proposed regulatory measures include adjusting leverage ratios and imposing investment limits, utilizing the "emergency intervention power."

Currently, certain individual stock leveraged ETFs in the Korean market use a maximum leverage of 2x. Regulators are discussing whether to temporarily reduce leverage ratios during periods of abnormal market volatility to mitigate risks associated with concentrated trading. (This proposal draws inspiration from recent regulatory measures in Hong Kong, where the Securities and Futures Commission previously permitted institutions meeting asset management capabilities, risk control standards, and disclosure requirements to adjust the leverage multiples of listed leveraged and inverse products, providing flexibility for dynamic market supervision.)

South Korean regulators believe that under the current system, matters involving changes to the income structure may require approval from a fund holders' meeting, making it difficult to respond swiftly under extreme market conditions. Therefore, they plan to establish an emergency regulatory mechanism that can be activated without complex procedures.

In addition, South Korea’s financial regulators are also considering: setting individual investment limits for single-stock leveraged ETFs, capping investment limits at approximately 20% to prevent excessive capital concentration, and introducing a real trading simulation system to enhance investors’ understanding of the risks associated with leveraged products.

South Korea’s regulators stated that the increase in the basic margin primarily raises the investment threshold, while the investment limit effectively sets a “cap” on capital inflows, together forming a complementary risk control system.

Previously, South Korea had already implemented new regulations. On the first day of implementation, trading volume for the 16 related leveraged ETFs amounted to approximately 3 trillion Korean won, roughly one-quarter of the 12.4 trillion Korean won recorded on the previous trading day and about 80% lower than the 15 trillion Korean won level on July 29.

South Korea's first day of tightened leverage ETF trading: trading volume plunges 75%

According to Korean media, on the first day of South Korea’s financial regulators implementing restrictions on individual stock leveraged ETFs—raising the minimum margin requirement for investors in single-stock leveraged ETFs from KRW 10 million to KRW 30 million effective July 31—the total trading volume of 16 individual stock leveraged and inverse ETFs amounted to KRW 3.3071 trillion. This represents a 75.3% decline compared to the previous day’s volume of KRW 12.4485 trillion on July 30. Compared to the July daily average trading volume of KRW 12.27 trillion, the regulators’ stringent measures have clearly had an immediate impact in curbing capital flows.

Excluding inverse products, the trading volume of the 14 major individual stock leveraged ETFs also declined by 64.4%, dropping from ₩693.54 billion on July 30 to ₩246.86 billion.

It is worth noting that the Korean stock market has generally identified individual stock leveraged ETFs as the "culprits" behind this crash, with many believing that these leveraged ETFs (such as SK Hynix) exacerbated market volatility and caused investors to suffer billions of dollars in losses.

Kim Yong-beom, Head of the Policy Office at the Office of the President of South Korea, has been formally charged with abuse of power, coercion, and obstruction of business by conservative former Seoul city councilor Lee Jong-pil, backed by the opposition People Power Party. The charges stem from allegations that Kim previously pushed for the listing of a leveraged ETF tied to a single semiconductor stock. This official is the same one who previously declared, “We should stop the listing of single-stock leveraged ETFs—over my dead body.” He also stirred controversy earlier with a claim suggesting “AI profit dividends for all South Korean citizens,” sparking what became known as the “Korean version of the common prosperity rumor,” which was only quelled after President Yoon Suk Yeol issued a clarification. See: “South Korea’s Financial Chaos: Samsung Strike, AI Communism, and the Crypto Sector’s Massive Capital Outflow.”

Stock market performance affects presidential standing: Lee Jae-myung's approval rating drops to its lowest point during his term.

Affected by the above market volatility, South Korean President Lee Jae-myung, who has long encouraged the public to stay away from real estate speculation and invest in the stock market, has also been negatively impacted.

A poll released today shows that South Korean President Yoon Suk Yeol's approval rating has dropped to its lowest level since he took office in June last year, amid controversies including the stock market plunge. The poll, conducted by Realmeter and commissioned by media outlet EKN, shows that positive evaluations of President Yoon among South Koreans fell by 0.4 percentage points from the previous week to 45.9%, marking the third consecutive week of decline; negative evaluations rose by 1 percentage point to 50.5%, surpassing the key 50% threshold for the first time.

Another poll conducted by the same polling agency showed that the ruling party, the Democratic Party, received 45.1% support, an increase of 3.8 percentage points from the previous week, while the main opposition party, the People Power Party, saw its support drop by 2.9 percentage points to 37.7%.

It can only be said that when the market rises, a president who encourages stock trading is revered like a god of wealth; but when the market falls, the president becomes the biggest scapegoat.

After a prolonged slump throughout July, South Korea’s KOSPI index surged more than 17% intraday on July 31, recording its largest single-day gain in history. While some investors optimistically view this rally as a “signal flare” indicating a trend reversal, market experts argue that the episode once again confirms the fragile structure of South Korea’s stock market, which is highly susceptible to foreign capital flows and volatile swings—suggesting this rebound may ultimately amount to nothing more than a “dead cat bounce.”

Data shows that just over two minutes after opening, foreign investors net purchased 1.6 trillion KRW in Korean stocks; by closing, their total net purchases for the day reached 7.18 trillion KRW, setting a new all-time high. Meanwhile, Korean retail investors net sold 8.2 trillion KRW, also setting a new all-time high for single-day net selling.

In other words, last Friday, Korean and foreign investors briefly reached a moment of mutual frustration.

Morgan Stanley upgrades South Korea's stock market rating to overweight, with potential upside of up to 36%.

Today, Morgan Stanley upgraded its rating on Korean equities from neutral to overweight, citing recent "leverage deleveraging" as creating better entry opportunities for investors to participate in artificial intelligence trading and the industrial supercycle theme.

Strategists including Daniel K. Blake believe that, following significant unwinding of crowded trades and leveraged positions, the South Korean KOSPI index still has 36% upside potential from its 9,000-point target.

In terms of details, analysts believe the recent sell-off was “primarily driven by technical factors” and noted that “the deleveraging process involving leveraged ETFs, hedge fund leverage, and retail margin trading is more than halfway complete.” Morgan Stanley expects the KOSPI index to fluctuate between 5,500 and 10,500 in the short term and believes Samsung Electronics and SK Hynix will provide valuation support to the market; stocks in industries such as industrials, defense, and financials are expected to benefit from favorable factors.