CMSC has released a report analyzing the current state of margin financing deleveraging in South Korea and its potential effects on the A-share market. Externally, the deleveraging process in South Korea's stock market is ongoing, creating a transmission effect on A-share market sentiment. However, recent signals of market stabilization have been released frequently, indicating that a policy floor for the A-share market has been established.
Recent ETF net inflow data shows that broad-based ETFs saw significant net inflows last week, exceeding 500 billion yuan in cumulative weekly net inflow. Looking ahead, following the convening of market stability meetings, regulators are expected to increase their efforts to stabilize the market. If the market experiences an unexpected downturn, stabilization measures could mirror the intensity seen in April of last year, further deploying measures such as capital support, state-owned enterprise buybacks, and increased share purchases and buybacks by financial institutions to stabilize the capital market and bolster investor confidence.
Current Status of Deleveraging in South Korea's Margin Financing
According to data from the Korea Financial Investment Association, the total credit margin balance across the South Korean market peaked at 38.6 trillion won on June 24, but subsequently declined rapidly amid a wave of forced liquidations triggered by a sharp drop in technology stocks. By July 24, the total market credit margin balance had fallen to 32.67 trillion won, a decrease of 15.4%. Compared to the pace of margin balance reduction, the contraction in the scale of South Korea's leveraged ETFs has been faster and more significant, exerting a more direct accelerating effect on the market decline. For example, the SAMSUNG KODEX 2x Long ETF saw its size plummet from a high of 74 billion won on June 19 to 38 billion won on July 27, a decline of 48%.
Monetary Policy and Interest Rates
Last week (July 20-24), the central bank's open market operations saw a net withdrawal of 293 billion yuan. In the coming week, 2.2205 trillion yuan in reverse repurchase agreements and 400 billion yuan in Medium-term Lending Facility (MLF) will mature. Money market rates have declined, with both short-term and long-term government bond yields trending downward. The issuance scale of negotiable certificates of deposit (NCDs) has expanded, while issuance rates have shown mixed results. As of July 24, the 7-day repurchase rate (R007) fell by 3.4 basis points, the 7-day deposit facility rate (DR007) fell by 3.4 basis points, the 1-year government bond yield fell by 0.5 basis points, and the 10-year government bond yield fell by 1.2 basis points. The issuance scale of NCDs increased by 424.65 billion yuan, while rates for 3-month and 6-month NCDs rose, and the 1-month NCD rate fell.
Capital Supply and Demand
Traceable capital in the secondary market showed net outflows. Margin balances declined, with net selling of margin funds reaching 90.97 billion yuan. ETFs saw net inflows of 56.22 billion yuan. The issuance of newly established public equity funds decreased. The scale of net reductions in holdings by major shareholders declined, and the scale of announced planned reductions also decreased.
Market Preferences
In terms of sector preferences, industries such as public utilities, petroleum and petrochemicals, and transportation saw relatively high net inflows from various funds. Inflows and outflows for broad-based ETFs were mixed, with net purchases concentrated in the STAR 50 ETF and net redemptions in the SSE 50 ETF. Sector ETFs also saw a mix of inflows and outflows, with net purchases in the information technology ETF and net redemptions in the financial and real estate (excluding brokerages) ETF. The ETF with the highest net subscriptions was the Harvest SSE STAR Market Chip ETF, while the ETF with the highest net redemptions was the CSI Full-Index Communication Equipment ETF.
Risk Warning
Economic data may fall short of expectations; overseas policies may tighten more than anticipated.
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