The South Korean stock market experienced another significant decline on July 16th, with the benchmark KOSPI index closing down 6.37%, falling below the key psychological level of 7,000 points. This drop came just one day after the index had surged 6.24%.
This volatility has come at a heavy cost for investors. A 39-year-old office worker in South Korea, who invested 80 million won (approximately 360,000 RMB) intended for a wedding home purchase into the stock market, now faces paper losses of nearly a quarter of that amount. "If the share price doesn't recover, I might have to postpone my wedding," he lamented.
In this year's rollercoaster market, many retail investors amplified both their potential gains and risks by using margin trading and leveraged ETFs. When the market turned, wealth evaporated rapidly, triggering forced liquidations.
Statistics reveal that the scale of forced liquidations in the South Korean stock market began to surge sharply from May. From May to July 14th, the total amount of forced liquidations reached 2.3 trillion won (approximately 10.4 billion RMB).
On July 16th, the South Korean Financial Services Commission announced measures targeting single-stock leveraged ETFs, stating that South Korea will prohibit the listing of new single-stock leveraged products. A market-triggered, regulator-driven de-leveraging process is now underway.
This year, the South Korean stock market was one of the world's top performers. The KOSPI index soared from the start of the year, reaching an all-time high by June 22nd with a cumulative gain of 116%. However, it then reversed sharply. On Monday, July 13th, major memory chip maker SK Hynix Inc plunged 15.37%, its largest single-day drop on record, while Samsung Electronics Co Ltd fell 10.70%. The KOSPI index itself crashed 8.95%, losing the 7,000-point level.
Just two days later on the 15th, the KOSPI opened sharply higher, quickly reclaiming the 7,000-point mark and closing up 6.24%. The following day, July 16th, it fell 6.37% to 6,820.6 points, re-entering a technical bear market, down 25% from its June peak. SK Hynix Inc dropped over 11% and Samsung Electronics Co Ltd fell nearly 9%. Such extreme volatility has become the norm.
Data shows that the Korea Exchange has initiated 36 temporary trading halts and triggered 7 market-wide circuit breakers this year, exceeding half of the historical total since the mechanism was established in 2000. Meanwhile, the KOSPI Volatility Index has risen 281.8% since last December, remaining at historically high levels.
In this environment, ordinary investors are bearing the brunt of the pressure. One 31-year-old office worker in Seoul invested 15 million won (approximately 68,000 RMB) in a double-leveraged product on SK Hynix Inc in early July. After entering the market, the stock price fell rapidly, erasing one-third of his principal. "The loss was double the decline in SK Hynix's stock price. The huge shock has kept me awake every night," he said.
Lee Seung-ho, a 24-year-old university student, experienced a classic cycle of "getting rich quickly to losing everything." He used margin to amplify his 10-20 million won principal to 300 million won (approximately 1.36 million RMB), but nearly all gains were wiped out during the market correction. "It rose as fiercely as it fell. People only see the potential for doubled returns but ignore that losses are similarly magnified," he noted.
Analysts point to three key drivers behind South Korea's leveraged trading boom: wealth anxiety due to high housing and living costs, government policies encouraging capital flow into the stock market, and financial convenience through mobile trading and easy credit access.
Goldman Sachs noted that the recent downturn was significantly amplified, primarily due to rapid de-leveraging in newly listed single-stock ETFs, triggering a self-reinforcing chain of liquidations that decoupled from fundamental drivers.
Exclusive calculations based on data from the Korea Financial Investment Association show that the margin balance in the South Korean stock market rose from 27.4 trillion won (approximately 1.25 trillion RMB) in early January to a peak of 38.6 trillion won (approximately 1.76 trillion RMB) on June 24th, before quickly falling back. By July 14th, it had dropped to 34.7 trillion won, a decline of 3.9 trillion won (approximately 177 billion RMB) from the peak.
From the market's high on June 22nd to July 14th, the amount in South Korean investors' margin accounts decreased by 20.9 trillion won (approximately 957 billion RMB).
An analyst from CICC pointed out that South Korea's initial margin requirement is as low as 40% (lower than the US's 50% and China's 100%), allowing leverage of up to 2.5 times, which makes the market more vulnerable to volatility. "When the decline reaches a certain threshold, investors will face margin calls, otherwise they will be forcibly liquidated, a process that further increases the downward pressure on stocks bought on margin."
From a time perspective, the scale of forced liquidations began to surge from May: 550.8 billion won in March, increasing to 707.7 billion won in May, reaching 1.12 trillion won in June, and already hitting 473.6 billion won by July 14th. The total from May to July 14th reached 2.3 trillion won (approximately 104 billion RMB).
Simultaneously, 16 single-stock leveraged ETFs on Samsung Electronics Co Ltd and SK Hynix Inc, launched on May 27th, became significant amplifiers due to the high concentration of the KOSPI index.
An analyst from Huatai Securities Research Institute explained that such products require daily rebalancing operations—buying more when prices rise and selling when they fall—which can propel rallies and accelerate sell-offs.
Data shows that from their listing to July 15th, the asset size of these 16 leveraged ETFs reached about 12.4 trillion won. South Korean retail investors were the largest buyers, with cumulative net purchases of approximately 13.67 trillion won (approximately 621 billion RMB), while institutions have been net sellers.
However, this week also saw net selling by South Korean retail investors. For example, the KODEX SK Hynix Leveraged ETF saw net purchases of 4.73 trillion won by retail investors since listing. Even as SK Hynix Inc's stock price fell 28.62% from its June 25th high, retail investors still made net purchases of 1.55 trillion won. It was only in the last two trading days (14th and 15th) that this turned to net selling, with a total of 474.4 billion won sold over those two days.
The analyst noted that by July 15th, the absolute size of leveraged ETFs had fallen by more than 50% compared to the June 25th peak. This means the actual trading amount corresponding to the rebalancing mechanism has also decreased proportionally, suggesting the objective impact on the market should be smaller than during the peak period.
However, the analyst also emphasized that the recent decline in the total size of leveraged ETFs mainly comes from the contraction in net asset value due to falling underlying stock prices, while the number of ETF shares has only seen slower expansion, not a significant reduction. This indicates the structural foundation for leverage may still exist, with no clear signs of contraction yet.
Another analyst commented that the current de-leveraging still appears largely passive. "Only when the margin balance declines while forced liquidation amounts continue to fall and investor account funds stabilize, will it indicate the market is truly nearing the completion of risk clearance."
As market turbulence intensified, regulators have begun to intervene explicitly. On July 15th, South Korean President Lee Jae-myung, during a briefing, directly named single-stock leveraged ETFs on Samsung Electronics Co Ltd and SK Hynix Inc, requesting relevant departments to "swiftly and properly formulate supplementary countermeasures." The head of the Financial Supervisory Service responded on the spot, taking responsibility.
On July 16th, the Financial Services Commission announced the measures to ban new listings of single-stock leveraged products. South Korea also strengthened margin requirements for single-stock leveraged trading, raising the minimum margin from 10 million won to 30 million won and recognizing only cash as eligible margin. Additionally, single-stock leveraged trading will be limited to 20 shares per transaction.
The analyst pointed out that, based on historical experience, South Korean regulators tend to prefer gradual adjustments aimed at stabilizing market expectations, rather than sharply tightening policies or forcing rapid clear-outs in the short term. For example, the regulation of Contracts for Difference (CFD) trading in 2023 was completed by gradually raising margin requirements over several months. The tightening of regulations on Equity-Linked Securities (ELS) also took 1 to 2 years. "If subsequent measures follow this gradual pace, the impact on the market is expected to be relatively limited."
From a longer-term perspective, leverage is more of a structural factor affecting short-term volatility rather than the core variable determining the central price level of stocks. "As leverage levels gradually unwind and regulatory uncertainties are resolved, the market's focus is likely to return to the fundamentals of the semiconductor industry represented by South Korea's leading companies, which is a more fundamental driver of the South Korean stock market's medium to long-term trend," the analyst added.
Another analyst warned that if the South Korean stock market continues to de-leverage, risks could spill over to SK Hynix Inc's ADRs and transmit to global memory chip companies like Micron Technology and SanDisk. However, volatility in the South Korean market alone is likely insufficient to trigger a global stock market crash. "Only if South Korea's de-leveraging coincides with a global downward revision in AI investment expectations, concentrated fund redemptions, and exchange rate pressures, could localized risks escalate into systemic risks."
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