Global markets experienced a brutal downturn today, with South Korea’s index plunging 10.84% and triggering its eighth circuit breaker this year (note: the 5% breaker applies to futures, while the spot market uses an 8% threshold).
Since the circuit breaker mechanism was introduced in 2000, it has been triggered 11 times, with 8 of those instances occurring in 2025. Japan also saw a steep decline, and U.S. stocks tumbled overnight, continuing their slide in after-hours trading. Meanwhile, China’s A-shares failed to decouple from the global rout. Just six weeks ago, the narrative of a "Golden Age for Korean women" was dominating headlines. Looking back, the term "illusion" now seems perfectly apt, capturing the social frenzy beneath the bubble—a surreal, dreamlike feeling that is hard to believe. Two days after that peak, the Golden Age topped out. Six weeks later, the Korean index has retraced 35%, a magnitude comparable to the first wave of the Shanghai Composite’s deleveraging during China’s 2015 stock market crash.
Six weeks ago, the market was so incredulous of the rally that it refused to believe a decline was possible. Now, six weeks later, the market is so stunned by the plunge that it cannot envision a recovery. Given the similarity in magnitude, it is worth considering: could a stabilization phase be imminent?
What Caused the Plunge?
To determine if the market can stabilize, we must first examine the reasons for today’s collapse. This global sell-off in silicon-based assets was sparked by three key catalysts.
The first catalyst is the "circular financing" of Nvidia being scrutinized by the bond market. Nvidia is advancing a total of over $750 billion in AI infrastructure partnerships, including a $500 billion deal with SK Group and a $250 billion data center financing guarantee being negotiated with OpenAI. What does this mean? Nvidia is no longer just selling chips; it is acting as a bank for its customers. You buy my chips, and I help you find the money to buy them. This is "circular financing." The bond market is not fooled. The chief investment officer of Coherence Credit Strategies stated bluntly: "The massive capital expenditure needed to build AI infrastructure is causing a supply shock in the debt market. The market is worried that opaque financial structures, off-balance-sheet transactions, and complex inter-company relationships could create 'financial alchemy.'" In plain language: does this resemble subprime mortgages? The surge in CDS by 14 basis points is the bond market asking a critical question: is the massive capital spending on AI infrastructure a moat or a credit black hole? Why did Apple surpass Nvidia? Because Apple is not blindly pouring money into AI, preferring to "rent computing power" rather than build its own. The market rewards restraint and punishes gambling.
The second catalyst is the listing of ChangXin Memory Technologies (CXMT) on the STAR Market, which is disrupting the global DRAM pricing structure. CXMT raised 57.9 billion yuan through its IPO. Its global DRAM market share is set to expand from 7.67% to 17%, with production capacity increasing from 280,000 wafers per month to 500,000 by 2028. The global DRAM supply landscape is changing: a market once dominated by three oligopolists (SK Hynix, Samsung, Micron) now has a fourth player. Morgan Stanley has already warned that the storage cycle will peak in the fourth quarter. CXMT’s capacity expansion first negatively impacts consumer-focused memory module companies like GigaDevice, Longsys, and Biwin Storage, which saw stocks hit limit-down or experience double-digit declines today. While there is no immediate threat to AI-related HBM (High Bandwidth Memory), it represents a long-term risk.
The third catalyst is the death spiral of South Korea’s leveraged ETFs. This is the true reason for the severity of South Korea’s decline. On May 27, South Korea approved 2x leveraged ETFs for Samsung and SK Hynix, attracting 3 trillion won in their first month of listing. These 2x leveraged ETFs are tied to single stocks and rebalanced daily—buying on rallies and selling on declines, acting as natural amplifiers of volatility. From the KOSPI’s peak of 35%, the 2x leveraged ETFs have likely fallen over 60%. South Korea’s margin debt hit a record 38 trillion won, with nearly one-tenth of retail investors facing margin calls or forced liquidations. Goldman Sachs’ Seoul team summed it up: the core driver of the crash is the concentrated deleveraging of single-stock leveraged ETFs, not a fundamental weakening.
These three catalysts form a closed loop: Nvidia’s circular financing concerns → global doubts about AI capital spending → anticipation of a storage cycle peak → CXMT’s capacity expansion → South Korea’s deleveraging → a revaluation of global silicon-based assets.
Fundamentals Haven’t Collapsed, But Pricing Has
Three catalysts have struck, and they look alarming. But upon closer inspection, each catalyst’s "destructive power" has been overblown in pricing. Take the first catalyst—Nvidia’s circular financing. This is not new. When Nvidia provided financing support to its customers last year, the market debated it. A 14-basis-point surge in CDS is concerning, but an 82-basis-point level is not a danger zone. For investment-grade companies, CDS above 200 basis points is considered high-risk. One company to worry about is Oracle, whose CDS has risen to 203 basis points. But Nvidia is not there yet. A break above 100 basis points can be seen as a key signal of deepening crisis, but that hasn’t happened. So, what does this mean? A 14-basis-point one-day spike is a record, but the absolute level is not high—not yet a "credit crisis." The market is pricing in "concern," not "default," but the stock market is behaving as if a default is imminent.
Regarding the second catalyst—CXMT’s capacity expansion. CXMT is expanding standard DRAM capacity, from 280,000 to 500,000 wafers per month, targeting consumer and server general-purpose memory. However, for HBM, CXMT’s mass production is still in the planning stages and will likely be for HBM3, which lags behind SK Hynix by one generation. Therefore, CXMT’s expansion negatively impacts consumer memory module companies like GigaDevice and Longsys, but it has little substantive impact on SK Hynix’s HBM pricing power for the foreseeable future. This is a long-term risk, not an immediate one. Yet, the market is pricing SK Hynix as if it were on the verge of bankruptcy. SK Hynix’s current forward P/E ratio is less than 4 times. A 4x P/E ratio is a bankruptcy-level price. It implies that the market believes the company’s next year’s profit could buy the entire company in four years—provided it doesn’t go bankrupt. This is pricing for a company about to fail. But what is SK Hynix? It holds 52% of the global HBM market share, a share projected to reach 54% after the mass production of next-generation HBM4. Its operating profit margin for Q1 2026 is expected at 72%, and net profit margin at 77%. This company is not on the brink of failure; it is making unprecedented profits.
Overall, the market is in a state of panic, but the industry itself has not shown signs of an imminent downturn. The amplifier of this panic is South Korea’s leveraged market. However, once leverage blows up, it is largely spent and does not lead to an endless spiral. In terms of the KOSPI’s retracement, it is comparable to the first wave of the Shanghai Composite’s deleveraging in 2015, and valuations are now very cheap. At this point, investors should watch for potential rescue measures from South Korea. The deleveraging process in South Korea closely mirrors China’s 2015 experience: the government initially encouraged a bull market, then regulators worried about excessive leverage and tightened policies, leading to a crash. After the crash, China implemented rescue measures to stabilize liquidity, which ultimately saw the index bottom out on July 9, 2015, and rebound over 20%, before a second wave of deleveraging occurred later. If South Korea stabilizes, which sectors should be prioritized? The decline has been severe enough that a stabilization and rebound would not be surprising. The key question is: if it happens, what should A-share investors in silicon-based assets focus on? The most certain bet remains upstream equipment and materials. Regardless of which segments of the storage market CXMT’s expansion disrupts, one thing is clear: CXMT needs to expand and spend money. The 60+ billion yuan it raised will not be parked in wealth management products; it will be genuinely invested. The direction of that spending is upstream equipment and materials. These sectors profit from CXMT’s capital expenditure and are less dependent on storage cycle volatility. CXMT itself, as the leader, is also a consideration. If it ends, everything else ends. But other A-share storage companies should be approached with caution. CXMT’s expansion will likely hit them hardest. They may bounce back from sharp declines, but this would be a technical rebound from oversold conditions, not a fundamentally supported recovery, and it would likely be short-lived as the cycle has already peaked. This is why this segment has been the hardest hit in the current silicon-based adjustment. Sectors like fiber optics, with low entry barriers and more players entering, are also vulnerable. The optical module sector, previously a strong performer with relatively smaller declines, is now facing new uncertainties due to recent rumors, making its competitive landscape difficult to predict.
In summary, some of this adjustment is driven by trading factors, while others reflect genuine changes in fundamentals. After this correction, the silicon-based rally will diverge and narrow, rather than being a broad-based surge as before. For those uncertain about specific companies, using ETFs may be a better alternative. If you are confused about industry investments, uncertain about finding leaders and potential companies, or overwhelmed by sector volatility, please scan the QR code to join us for more detailed industry chain analysis and investment strategies. Follow Gelonghui Research Institute to seize opportunities and share in the dividends of the industrial revolution.
Disclaimer: This article is compiled by the investment research team of Beijing Gelonghui Investment Consulting Co., Ltd. (Duan Yuehan: A0160625050003). This report is prepared on an independent, objective, fair, and prudent basis. Information is sourced from public data and is legitimately and reasonably collected, summarized, and edited. Stock market investment carries risks; enter the market with caution. Any investment advice in this article should not be used as a basis for your investment decisions. You must make independent investment decisions and bear the risks yourself. Without the permission of the company, any unauthorized reproduction, copying, distribution, or publication is considered an infringement, and the company will pursue legal liability.
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