July 31st saw an epic-level rebound in the South Korean stock market.
Buoyed by the tech sector on Wall Street, the Korea Composite Stock Price Index (KOSPI) opened sharply higher, triggering the "Sidecar" mechanism and halting program trading for 5 minutes. By market close, KOSPI had surged 18.27%, with SK Hynix hitting its upper limit for a 30% gain, and Samsung Electronics rising over 28%.
Asia-Pacific markets collectively rebounded. Major A-share indices all closed higher, with the ChiNext and STAR 50 indexes rising over 3%. The Nikkei 225 rose nearly 4%, with SoftBank also hitting its upper limit.
Prior to this rebound, the South Korean stock market had just endured a brutal de-leveraging storm. KOSPI plunged from 9,115 points (June 22nd) to 5,594 points (July 30th) in just over a month, a drop of nearly 40%. The CSOP 2x Long SK Hynix Daily (-1x) ETF fell even more sharply, plunging 86%.
Regarding the sharp decline in Korean stocks, Nomura Securities pointed out in a research report dated July 28th that the adjustment was driven by liquidity and structural factors, rather than a deterioration in corporate fundamentals. Among them, the daily rebalancing mechanism of leveraged ETFs led to volatility decay, compounded by the flow characteristics of momentum-chasing and panic-selling capital, forming a "decline, liquidation, further decline" death spiral.
"Once liquidity pressure eases, fundamentally sound assets that were wrongfully sold off will be the first to rebound," an analyst based in Hong Kong, China, told Caijing.
Triple Positive Catalysts Resonate to Drive Rebound
The rebound in the South Korean stock market on July 31st was triggered by the resonance of multiple positive news catalysts.
First, earnings reports from North American cloud providers released positive signals for AI (Artificial Intelligence), with reports from both Microsoft and Amazon jointly dispelling prior market fears of an "AI bubble burst."
On the overnight US market, Microsoft's stock price surged 15.5%, marking its largest single-day gain since October 2008, with its market value increasing by approximately $450 billion in one day. Microsoft's Q4 revenue was $90.01 billion, a year-on-year increase of 18%, with Azure cloud business growth reaching 43%, the fastest pace in four years. More encouragingly for the market, Microsoft revised down its fiscal year 2027 capital expenditure forecast from $190 billion to $175 billion.
After US market close on July 30th, Amazon released its earnings report, stating that driven by robust AI demand, Q2 cloud business revenue grew 37% to $42.2 billion, the fastest growth rate since Q4 2021. Amazon revised up its 2026 capital expenditure forecast from the previous $200 billion to $220 billion. Amazon CEO Andy Jassy stated plainly: "Even if full-year capital expenditure is raised to $220 billion, computing power supply in 2026 will still not be able to fully meet all customer demand, a computing power shortage will also exist in 2027, and a large volume of computing power orders for 2028 have already been locked in advance."
Second, SK Group Chairman Chey Tae-won made a rare "bottom-fishing" move for his own company.
According to South Korean regulatory filings, Chey Tae-won purchased 3,620 shares of SK Hynix stock on the open market on July 30th. Based on the closing price of 1.322 million won (approximately $921) that day, the total value was about 4.79 billion won (approximately $3.2 million). This is the first time Chey Tae-won has directly held SK Hynix shares in his personal name, previously he only controlled the company indirectly through SK Square, SK Hynix's largest shareholder.
Chey Tae-won's purchase this time was precisely controlled below 5 billion won. According to South Korean disclosure regulations, planned purchase amounts exceeding 5 billion won must be reported 30 days in advance.
SK Hynix's stock price had reached an all-time high of 2.99 million won per share on June 25th, subsequently falling sharply to 1.32 million won, a drop of over 50% in just over a month. Chey Tae-won had stated as early as July 17th: "The demand for memory chips will persist, so stock prices will rise in the long run. Instead of repeatedly buying and selling, it's better to hold these stocks for the long term." The market widely interpreted this as a strong endorsement of the company's long-term value by its leader.
Third, the South Korean government announced a 20 trillion won AI investment plan.
On July 31st, the South Korean government announced a 20 trillion won (approximately $13.9 billion) capital injection into the sovereign wealth fund Korea Investment Corporation (KIC), earmarked for investment in artificial intelligence, data centers, and related infrastructure. For the first time, domestic assets will be included in the investment scope. The government will establish a new "Strategic Industry Investment Account" under KIC, with funding sources including equity contributions from policy banks and other public institutions. The new account is expected to officially begin operations next year. The South Korean government stated that this capital injection aims to "proactively respond" to the sustained intensification of global capital's interest in investing in South Korea and positions KIC as an "anchor investor" to attract foreign sovereign wealth funds and asset management institutions into the Korean market. Although the government statement did not directly link this plan to the market turmoil, the timing of the announcement was quite sensitive, with KOSPI having fallen over 17% in the three trading days prior to the announcement.
Comprehensive Tightening of Leveraged ETF Regulations
Following the violent de-leveraging in the South Korean stock market, the government's systemic regulation of leveraged ETFs is continuously tightening.
During parliamentary questioning on July 29th, South Korean Finance Minister Hong Kyung-wook acknowledged that the government "lacked sufficient consideration" when introducing single-stock leveraged ETFs earlier this year, failing to anticipate the destructive power of such products during extreme market volatility. Lee Bok-hyun, Chairman of the Financial Services Commission, also stated, "As the ultimate authority over financial markets, we regret failing to meet the public's expectations regarding the regulation of these products."
Faced with the systemic risks posed by leveraged ETFs, the South Korean government has introduced multiple rounds of control measures.
On July 16th, South Korea announced the first round of measures, including suspending the listing and advertising of new single-stock leveraged ETF products, tightening the management of ETF premiums/discounts by liquidity providers, raising the minimum cash margin requirement for single-stock leveraged ETFs from 10 million won to 30 million won, and increasing the minimum trading unit from 1 share to 20 shares.
On July 29th, following an emergency meeting, the Ministry of Economy and Finance announced that more measures would be taken to stabilize the stock market, including limiting retail investors' exposure to leveraged ETFs and increasing related trading costs.
On July 31st, new regulations took effect. For retail investors seeking to open new positions or increase holdings in single-stock leveraged ETFs listed domestically or abroad, the minimum cash margin that must be maintained in the account increased from 10 million won to 30 million won, and it must be held only in cash form; stocks, ETFs, and bonds no longer count.
Jung Chung-rae, a leader candidate of the Democratic Party of Korea, even proposed on July 29th to temporarily halt trading of single-stock leveraged ETFs. The Korea Exchange has also begun examining the feasibility of "temporarily banning short selling" and "narrowing price fluctuation limits." Institutions predict that South Korea will subsequently introduce stricter regulatory measures than those announced on July 16th.
Nomura Securities believes that the current de-leveraging process is a necessary prerequisite for the market's switch from being "liquidity-driven" to "fundamentals-driven." Several key signals are emerging: foreign selling has noticeably slowed, with net selling in July to date at only 9.8 trillion won, compared to 48.4 trillion and 44.5 trillion won in May and June, respectively; the AUM of leveraged ETFs has receded from its peak, and retail investor appetite for bargain-hunting has significantly cooled. Furthermore, corporate buybacks play a crucial role in this structural shift. Nomura predicts that South Korean stock buyback scales for 2026, 2027, and 2028 will reach 116 trillion won, 274 trillion won, and 328 trillion won, respectively, with approximately 90% of the buyback funds coming from the two semiconductor giants, Samsung Electronics and SK Hynix.
Invesco Great Wall believes that negative factors such as the leveraged ETF issue in the South Korean stock market may be gradually resolved in the future, and the recent market correction may have already fully played out. The AI industrial chain has seen a larger correction; after the short-term negative feedback loop in capital flows completes, it may usher in allocation opportunities again. The current negative narrative surrounding AI requires positive signals from North American cloud provider earnings reports to reverse, and these negative factors may gradually be resolved in the future.
However, deep-seated structural issues in the market persist. Some analysts also believe that this rebound is more of a technical recovery from extreme oversold conditions and a relief from the liquidity crisis, rather than a full reversal of the trend. Whether KOSPI can stabilize in the future will still depend heavily on the capital expenditure guidance of global tech giants and the cyclical trajectory of memory chip prices.
This article is from the WeChat public account "Du Shu Yi Zhi" (ID: dushuyizhi007), author: Cheng Mengqi.
