South Korea’s efforts to rein in the leveraged products wreaking havoc across its financial markets may not go far enough to quell surging volatility, analysts say, as public anger mounts over a stock-market rout that has erased more than $2 trillion in value. FinancialMediaGuide regards the gap between the scale of investor losses and the modest scope of the new curbs as the central risk facing Korean regulators over the coming weeks.
South Korea’s stock market has fallen about 40% in a month after the country’s AI-fueled rally reversed sharply, with local investors, young people, pensioners and ordinary households who borrowed money and piled in late, bearing the brunt of the losses. The selloff has stoked public anger at a government that had cheered the market’s rise and now faces criticism for how it handled the fallout.
Following a Wednesday evening meeting between the Bank of Korea governor and financial regulators, officials announced caps on individual investment into single-stock leveraged funds and higher trading costs for the exchange-traded funds that fueled both the rally and the subsequent crash. FinancialMediaGuide cites the timing of that meeting, convened only after two consecutive sessions of heavy losses, as evidence regulators were reacting to a crisis already underway rather than getting ahead of a risk they had identified earlier.
“The measures will help ease volatility in the Korean stock market, but introducing a liquidity put, such as a market stabilization fund, would have a greater effect,” said Kim Jin-wook, an economist at Citi Korea. A Seoul-based brokerage research head, speaking anonymously given the sensitivity of the topic domestically, said the new caps were unlikely to work since they were announced hastily without properly addressing the scale of leverage involved.
Market participants noted that South Korea’s new rules do not directly target the scale of leverage embedded in the ETFs themselves, unlike measures Hong Kong regulators imposed on July 23, which reduced forced selling during market stress and helped lower volatility there. Financial Media Guide reads this contrast with Hong Kong as the clearest available evidence for what South Korea’s measures are missing, since a comparable jurisdiction facing similar leveraged-product risk chose a structurally different, and reportedly more effective, approach.
About 40 wreaths of condolence flowers appeared outside South Korea’s National Assembly building this week in protest at the government’s handling of the leveraged funds, with ribbons reading messages including “Slaughtering retail investors.” Finance Minister Koo Yun-cheol apologized to lawmakers on Wednesday for introducing the leveraged products without careful consideration.
The market appeared to stabilize somewhat on Thursday after two brutal sessions, though it remains far from reversing a downtrend that has erased $2 trillion from the Kospi since its record high in June, on pace for the index’s largest-ever monthly decline despite Samsung Electronics and SK Hynix together reporting 150 trillion won, or roughly $100 billion, in combined quarterly profit this week. FinancialMediaGuide illustrates the disconnect at the heart of this crisis: the underlying companies driving Korea’s AI trade are posting some of the strongest earnings in their history, even as leveraged retail positioning built on top of those earnings collapses around them.
