South Korea's stock market roared to life in January, leading global gains, and authorities spotted an opportunity: attract more capital by introducing high-risk investment products, aiming to bolster the won. These products targeted the country's notoriously risk-taking retail investors. However, this gamble is now backfiring on President Lee Jae-myung.
The benchmark Kospi index plunged roughly 40% from its peak a month ago, according to sources, alarming senior officials and sparking widespread panic. Lee was on an 11-day diplomatic tour in South America, forcing him and his core advisors to monitor the situation remotely and urgently devise measures to stem the crash. Both heads of South Korea's top financial regulators canceled their planned vacations. Finance Minister Koo Yun-cheol, after apologizing to angry lawmakers, convened an emergency meeting with key economic policymakers on Wednesday. The late-night session, rare for including senior presidential office representatives, was delayed and lasted longer than scheduled, underscoring the gravity of the situation. Central bank Governor Rhee Chang-yong and other officials discussed emergency responses. Following the meeting, the Finance Ministry quickly rolled out measures to limit retail investors' use of leveraged ETFs, sparking a nearly 18% rally in the Kospi on Friday, its biggest single-day gain ever.
Despite the temporary calm, the political fallout is just beginning. "The damage is done," said retail investor Kim Dong Woo, 33, who criticized the government's slow response to the crisis. "There are too many victims." As of Monday morning, the Kospi had gained over 50% this year, the best performance among major economies, driven by the global AI boom boosting demand for memory chips, with SK Hynix and Samsung Electronics, which together account for more than half of the Kospi's market cap, benefiting significantly. However, this year is also the most volatile for the Kospi since it began trading in the 1980s. Data shows the index has seen 32 trading days with single-day moves of 5% or more, about a quarter of all trading days. This volatility now puts Lee in a difficult position. The former day trader, who lost money in the stock market, won the 2025 presidential election with a bold pledge to push the Kospi to 5,000 points, a target quickly breached in January. He has repeatedly urged Koreans to shift money from property to stocks, hoping to cool Seoul's overheated housing market.
This strategy initially worked, but the situation deteriorated after regulators approved over a dozen leveraged ETFs tracking Samsung Electronics and SK Hynix. These products amplify the daily returns of underlying assets through derivatives and borrowing. In most global markets, such products are held by professional investors, but in South Korea, retail investors dominate. Combined with the two chip stocks, these leveraged ETFs once accounted for over 70% of daily trading volume on the Kospi. "The irony is that the government, while claiming to control the situation, is the one that set up the gambling table," said Jung Eui-jung, head of the Korea Shareholder Alliance, which has 64,000 members. The presidential office responded that the ETFs were introduced to diversify investor options and provide access to products previously only available overseas. It stated that the ETFs were launched during a period of "high volatility," necessitating measures to stabilize the market and protect investors. "The government is closely monitoring market reactions and preparing additional measures. The president's office is fully aware of the market's concerns and is working hard to address the situation," the statement said.
Lee has been in power for only 14 months, with his party holding a solid majority in parliament and no imminent elections. However, a drop in approval ratings or a stock market crash that drags down overall consumption could make it harder to achieve policy goals, including ambitious fiscal revenue targets, expanding social welfare spending, tightening regulations on major conglomerates, and building infrastructure around a planned new chip industrial complex. During the selloff last week, tense parliamentary hearings were held, with lawmakers from both sides demanding explanations. The key question: Was the government too quick to approve leveraged ETFs without adequate regulatory safeguards, exposing retail investors to avoidable risks? The hearings revealed that the turmoil originated in January when Lee's top policy advisor, Kim Yong-beom, convened a meeting with major securities firms. Worried about capital outflows as Korean retail investors increased overseas stock purchases, putting pressure on the won, the government saw the approval of new leveraged ETFs as part of a long-term strategy to shift household savings from real estate and overseas investments into the domestic capital market. After regulators opened a fast-track approval process, the first leveraged ETFs tracking Samsung Electronics and SK Hynix debuted on the Korean stock exchange in late May.
"The entire approval process was exceptionally fast. Without the nod from the presidential office, such speed would have been impossible," said Park Soo-young, a lawmaker from the opposition People Power Party on the National Assembly's Strategy and Finance Committee. Park argued the controversy extends beyond the ETFs themselves, stating the government should not set specific targets for the stock market, as it creates an expectation that policymakers will continue to prop it up regardless of market conditions. He accused the Lee administration of becoming more aggressive as the market rose, with moves like approving leveraged ETFs and increasing the National Pension Service's stock allocation turning market boosting from a means of developing the capital market into a policy goal. "Despite objections from asset managers, the government pushed ahead with almost no public debate and launched these products about a week before the June local elections," Park said. "They turned Korea's capital market into a casino bigger than Las Vegas." One source involved in the discussions said Lee's team was careful not to publicly celebrate the market rally, hoping to maintain distance to avoid further fueling investment frenzy. However, at a press conference marking his first anniversary on June 8, Lee downplayed the Kospi's dip below 8,000 points, calling it a temporary correction and saying the market was still undervalued. Later that month, Lee's policy chief Kim offered more optimistic signals, predicting Korea would become one of the world's top three stock markets by market cap within two to three years. International investment banks like JPMorgan and Goldman Sachs were also bullish on Korean stocks at the time. Goldman Sachs raised its Kospi target to 9,000 points in May, and a week later, JPMorgan raised its optimistic scenario target to 10,000 points.
Lee Yoon-soo, an economics professor at Seoul National University, said in a phone interview that from a policy perspective, introducing such products was reasonable given the pressure on the won, but that the existence of similar products in other countries doesn't necessarily mean they are suitable for the Korean market. "Even if the products themselves aren't fundamentally flawed, if the specific characteristics of the Korean market and the risks these products could pose weren't fully considered, it's a policy failure," he said. Jung In Yun, CEO of Fibonacci Asset Management Global, was more direct. "Never forget, 'Squid Game' embodies the Korean mindset," he said, referring to the popular Netflix series where contestants risk their lives for a life-changing cash prize. "Now, the market is truly bleeding."
Comments