Original|Odaily Planet Daily (@OdailyChina)
Author|Wenser(@wenser 2010 )
It was completely unexpected that the first to arrive might be a Bank of Korea rate hike, even before a new high for the KOSPI index!
According to foreign media reports, sources indicate that the market widely expects the Bank of Korea to raise interest rates by 25 basis points at tomorrow's monetary policy meeting, lifting the benchmark rate to 2.75%;If this materializes, it will be Korea's first rate hike in about three and a half years, since January 2023. Furthermore, bond market experts predict further hikes this year, with the benchmark rate reaching 3.00% by year-end and rising to 3.25% in the first half of next year.
For a moment, despite today's violent rebound in the KOSPI index, it still caused a degree of market panic. Additionally, due to the extreme volatility in ETFs based on companies like SK Hynix and Samsung Electronics, Korean brokerages are planning to increase the minimum margin requirement for single-stock leveraged ETF investments fivefold.
One month ago, Korean girls were cheering for "the arrival of humanity's golden age" due to the stock market surge; one month later, might the Korean market enter a crisis era due to liquidity tightening and higher market entry barriers?
Korean Stock Market Under Comprehensive Scrutiny: From the President to Brokerages, from the Central Bank to Financial Regulators
The consecutive sharp rallies and plunges in the stock market have driven the Korean people, often called "a nation born with leverage," into utter frenzy. On July 13th, a case occurred in Busan, South Korea, where an "investment KOL was stabbed by an emotionally charged fan who lost money."
Such extreme and frenzied speculative fervor has triggered widespread concern and discussion across Korean society. From Korean President Lee Jae-myung, to the Chairman of the Korea Financial Investment Association Hwang Sung-yeop and the CEOs of Korea's 10 major asset management companies; from the Bank of Korea to central financial regulatory authorities—everyone is revolving around "stocks," "securities," and the "financial market."
Korean President Lee Jae-myung: Time Needed for Stabilization After Sharp Rally
Today, Korean President Lee Jae-myung stated during a policy meeting with senior government officials in Seoul:"The domestic stock market is currently quite unstable. As the market has experienced an unprecedented sharp rise in such a short period of time historically, it requires time and a certain degree of volatility to stabilize."
Regarding the controversy surrounding leveraged ETFs, Lee acknowledged its existence and has urged the heads of the Financial Supervisory Service (FSS) and Korea Exchange (KRX) to swiftly address related issues and formulate follow-up countermeasures.
Market participants expect regulatory authorities to step in to curb the impact of such high-risk products on market stability, including potentially raising the minimum margin requirements for investing in leveraged ETFs.On Tuesday, the main opposition People Power Party accused the Lee Jae-myung administration of proposing ambitious stock market targets on one hand while ignoring the accumulating leverage risks on the other, thereby encouraging excessive risk-taking.
Previously, influenced by the global AI industry chain and semiconductor boom, the Korean government had proposed an "800 trillion won chip plant investment plan" and planned to invest at least 30 trillion won in the chip sector over the next 15 years.Just half a month later, consecutive circuit breakers in the KOSPI index, involving giants like SK Hynix and Samsung, caused the once "semiconductor glory" that the Korean government and nation were proud of to fade considerably for a time.
However, from a market perspective, sharp rises are often followed by sharp falls. It is also reasonable for the Korean government to promote domestic industrial development and long-term construction. However, during this process, who becomes the cost and who reaps the benefits depends on who performs better.
Korean Brokerages: Plan to Raise Minimum Margin for Single-Stock Leveraged ETF Investments to
According to The Korea Herald, the Korean brokerage industry has agreed to tighten investor protection rules for single-stock leveraged ETFs.
This Tuesday (July 14th), the Korea Financial Investment Association convened an emergency meeting with major brokerage CEOs to assess the market situation of leveraged ETFs tracking Samsung Electronics and SK Hynix and discuss countermeasures.The participating institutions have in principle agreed to raise minimum margin requirements to curb excessive use of leverage by retail investors. One proposal under discussion is to raise the minimum margin threshold from 10 million won (Odaily Planet Daily note: approximately $6,714) to 50 million won (Odaily Planet Daily note: approximately $33,570).
The institutions also agreed to provide more targeted risk warnings based on investor age and portfolio situation, and strengthen investor education to help investors better understand the structure and risks of such products. Furthermore, the industry agreed to more evenly distribute rebalancing and hedging trades throughout the trading session to reduce market impact from concentrated buying and selling before the close.
Bank of Korea: May Hike 25 Basis Points This Thursday, Tightening Cycle Approaching
According to BigGo Finance, sources from the financial sector revealed that the market widely expects the Bank of Korea to raise interest rates by 25 basis points at this Thursday's meeting, lifting the benchmark rate from 2.50% to 2.75%.This would be the first rate hike in about three and a half years, since January 2023, and likely marks the start of a tightening cycle.
Bond market experts predict further hikes this year, with the benchmark rate reaching 3.00% by year-end and rising to 3.25% in the first half of next year, meaning borrowers need to prepare for at least a year of rising interest rates.
A central bank rate hike is itself a signal to control on-market liquidity. Because this means—
- Margin loan rates rise, directly increasing the cost of leveraged investment;
- Holding costs for existing leveraged funds and investments surge dramatically, forcing potential partial sales of previously leveraged stock purchases to obtain liquidity;
- Higher funding costs further transmit to the leveraged trading side, causing further contraction in new leveraged funds;
From August 2021 to January 2023, during Korea's last rate hike cycle, the KOSPI index first surged to near 3000 points, then fell to below 2300 points, a drop of nearly 25%. Now, within the past year, the KOSPI index's low point was around 3080 points, but its high point has risen to 9385 points, a cumulative increase of over 204%. JPMorgan data shows the KOSPI index's year-to-date gain of 109% crushes global markets (the S&P 500 is up only 11% over the same period).
However, as mentioned earlier, the major components of single leveraged ETFs—Samsung Electronics and SK Hynix—together account for about 43% to 50% of the KOSPI's weight. This "mad bull run" was never a true all-around bloom, but an undernourished false prosperity.
On the other side, retail investors are also facing pressure from both the central bank and leveraged assets.
Retail Investors Under Pressure: Foreign Investors Sell Over $110 Billion in Assets This Year, Korean Retail Investors Absorbing It All
According to Goldman Sachs data, within the Korean financial market, foreign investors have net sold a cumulative $110 billion in assets this year, over 5 times the high of the past 7 years ($22 billion in 2021); they offloaded $31 billion in assets in June alone, setting a monthly record.
Meanwhile, Korean retail investors are accelerating their buying: after purchasing 42.4 trillion won in June, Korean retail investors have net bought a cumulative 13.2 trillion won in KOSPI stocks this month. As of July 14th, the margin balance used by retail investors for KOSPI stock investments was 28 trillion won, having reached a historical high of 29.8 trillion won on June 24th.
However, retail investors, who primarily rely on margin trading and leveraged funds, are also facing risks related to funding restrictions.
Data released by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) shows thatas of the end of June, the stock loan balance related to the online investment finance industry was 898.3 billion won, an increase of 374.5 billion won compared to the first half of the year. Compared to 351.3 billion won at the end of last year, it surged 71.5% within half a year.
In response, the FSS will issue management targets to online investment finance companies, requiring that the monthly new stock loan scale not exceed 30% of the previous month's new related loan scale. This new management measure will take effect immediately from August 16th. Additionally, to prevent excessive concentration of stock loan business by online investment finance companies leading to risk accumulation, regulators stipulate thatthe stock loan limit for a single borrower shall in principle not exceed 1 billion won.However, if a company can control its end-of-month stock loan balance from July onwards to within the level at the end of June, it may be exempted.
In summary, regulatory authorities are controlling retail leverage at the funding source level to avoid further fueling the stock market bubble.
In conclusion, Korean government agencies are implementing four measures—"closing the gate, limiting loans, raising thresholds, and cooling down the frenzy"—to address the risks associated with the current domestic stock market characterized by sharp swings, structural imbalances, and accelerating bubbles.
As for whether the rate hike will blow the first whistle for this year's stock market downtrend, it still depends on how the market reacts tomorrow.
