(Text by Observer Network, Liu Bai)
South Korean stock market has scared the South Korean government.
On the second day after the KOSPI triggered a circuit breaker for the sixth time this year, the South Korean government convened a meeting on July 8 with heads of central banks and financial regulatory agencies. The meeting called for close monitoring of market fluctuations, with particular attention paid to risks associated with excessive concentration in the semiconductor sector and risks posed by single-stock leveraged ETFs.
On the same day, the KOSPI fell more than 5%, reaching 7246.79 points. The closing price has been declining for three consecutive trading days since June, falling more than 20% from the historical closing record set in June. This decline is generally considered to be a threshold that confirms the market has entered a "bear market".
In recent weeks, the Korean stock market has been in a state of "twitching." After experiencing a frenzied rise that could be considered the "most extreme in global history," the Korean stock market has started to behave like a roller coaster, with increasing signs of vulnerability.
For Korean society, what is even more alarming than the shock itself may be the wealth illusion that has emerged behind this wave of increases in wealth.
In the past few months, the global AI boom has driven the KOSPI to rapid growth.
As an important production base for advanced storage chips worldwide, South Korea is regarded by international capital as a key beneficiary of the AI industry chain. Chip stocks such as Samsung Electronics and SK Hynix have been performing strongly, driving the KOSPI to continuously set new historical highs. In mid-June, the index broke through 9100 points, with the annual peak increase reaching over 100%.
South Korea's Composite Stock Index trends over the past month (top) and this year (bottom). Financial chart analysis platform TradingView.
South Korean retail investors can’t sit still.
The South Korean newspaper 'Chungang Daily' reported a representative story: A South Korean internet user who claimed to be a tutoring teacher posted that he invested all of his 500 million won, which he had saved over four years, in Samsung Electronics when the stock price was about 54,000 won.
As the stock price continued to rise, this investment has now appreciated to about 3 billion Korean won. He also showed a screenshot of his securities account and announced publicly that he would end his 20-year teaching career and retire early.
Such stories quickly spread on South Korean social media, further fueling market sentiment.
This year, South Korea also introduced a single stock leveraged ETF, allowing investors to place bets with higher leverage on individual stocks such as Samsung Electronics and SK Hynix. This further lowers the barriers for ordinary investors to participate in the markets of popular technology stocks.
Seoul University economics professor Jaewon Choi said bluntly: "Nowadays, more and more people believe that it is no longer possible to achieve social class mobility through traditional channels. The only way to do so is through speculative assets."
Market sentiment also shifts quickly.
As global tech stocks fluctuate, profit-taking occurs, and regulatory authorities continue to warn of risks, the Korean stock market has entered a cycle of "plunge—rebound—further plunge". Reuters believes that after the surge driven by AI over the past year, investors are beginning to reconsider whether the continuously rising valuations of Korean chip stocks can withstand future performance tests.
If we only look at the stock market performance in the first half of the year, it's easy to mistakenly think that South Korea's economy has entered a "golden age". Clearly, this is not the case.
After entering July, the focus of public opinion began to change. Instead of discussing how high the Korean stock market could still rise, people were more concerned about whether this round of increases had already begun to overdraw the future.
On July 7, Samsung Electronics announced performance forecasts that were better than market expectations, but the Korean stock market still fell significantly. This contrast is seen by many analysts as an important sign of a change in market sentiment. If future growth expectations weaken, the large number of profit-taking positions accumulated previously could be executed, leading to rapid fluctuations in stock prices.
More noteworthy is the structural changes in South Korea's stock market.
In the past few months, what truly drove KOSPI’s continuous rise wasn’t the overall improvement in the performance of Korean companies, but rather the continuous influx of capital into a handful of semiconductor leaders such as Samsung Electronics and SK Hynix.
July 3rd, Seoul. The screens in Hyundai Bank’s trading rooms displayed indices such as KOSPI. IC Photo
According to Kim Hak-kyun, the head of the Xinrong Securities Research Center, the combined market value of the two companies accounts for approximately 57% of the KOSPI’s total market value. Moreover, both companies are part of the semiconductor industry, which means they tend to move in tandem, rising or falling together.
A Reuters analysis at the end of June and a recent judgment by the Korea Capital Market Institute (KCMI) also point to the same issue: excessive concentration of funds in a few tech stocks makes the index more vulnerable to the influence of individual heavyweight stocks, resulting in a significant increase in market volatility. When the entire market operates around the same track, increases in prices can be faster, but the market becomes even more fragile.
However, this prosperity did not benefit all Koreans.
"Central Daily News" Raises Sharp Questions: How many people truly benefited from this round of South Korean stock market rise?
The author sharply pointed out that this 'bull market' is more like a feast for Samsung Electronics and SK Hynix. For investors who do not hold these two stocks, the continuous increases in the Korean stock market 'are almost irrelevant to them'.
Data shows that although Samsung has millions of individual shareholders, retail investors hold only about 13% of the shares. Most investors hold small amounts of stock. In this current market situation, only a very small number of long-term shareholders have truly achieved “financial freedom”.
On the contrary, once the market corrections occur, the entire economy will have to bear the cost. This stock market frenzy driven by AI is more like a feast for a few individuals, rather than a real increase in wealth for everyone.
Since the launch of the single-stock leveraged ETF at the end of May, the transaction volume of related products has reached approximately 212 trillion Korean won. Ahn Cheol-soo, a member of the largest opposition party in South Korea, the People Power Party, publicly criticized that the KOSPI has “become a casino.” He argued that leveraged ETFs are a major factor that magnifies the sharp fluctuations in stock prices, and regulatory authorities should even consider delisting related products.
On July 7th, the Korean Financial Supervisory Service (FSS) once again publicly reminded investors to be wary of the risks posed to family finances by excessive use of credit financing and leverage ETFs. Leverage not only magnifies profits but also increases losses, making it prone to triggering a chain reaction of sell-offs during market volatility.
The Wall Street Journal is even more direct, describing the Korean stock market as increasingly resembling a "casino": If foreign capital continues to withdraw in the future, and a large number of high-leverage retail investors remain in the market to compete with each other, the Korean capital market could even evolve into a real-life "Squid Game" – where participants must take on greater risks in order not to be eliminated.
South Korean Deputy Prime Minister and Minister of Planning and Finance, Goo Ryeon-chan, also admitted on the 7th that the launch of such products indeed exacerbated market fluctuations. The government is studying measures to address this issue, and relevant departments will further assess risks and improve institutional designs.
This is fueled by a typical "fear of missing out" (FOMO).
Several individual Korean investors interviewed by Reuters believe that by focusing on the AI industry chain, it is possible to replicate the growth of chip stocks seen in the past year. This mindset drives more and more financing funds, creating a cycle where “the higher the price increases, the more funds are involved, and the price increases even more.”
The problem is that this cycle works the same when reversed: once there is a turnaround, funding positions are liquidated in large numbers, and the decline will be amplified by the same logic.
Media such as 'Korea Herald' and 'Korea Economic Daily' have been constantly reminding readers that the increasing number of investors buying stocks is not due to fundamental changes in the companies, but rather because they are worried about missing out on this rising market opportunity.
June 24th, a loan counter at a commercial bank in Seoul. The South Korean Central Bank warned on that day that rising housing prices and a positive stock market had led to an increase in “borrowing for investment,” which could threaten financial stability. IC Photo
When emotions rather than values drive the market, bubbles tend to accumulate quietly during this process.
Precisely because of this, as the Korean stock market continues to set new highs, terms such as 'valuation', 'concentration', 'leverage', and 'volatility' are appearing more and more frequently in media reports.
This wave of surge in the Korean stock market reminds many people of several previous moments of madness in the capital market.
Around 1999, there was an internet bubble; around 2021, there was the "Donghak Ant Movement" (a surge in investment among retail investors in South Korea). Both the South Korean stock market and the internet bubble experienced periods of rapid influx of capital, soaring leverage levels, and short-term index increases.
Every market cycle is accompanied by new industry stories, and many investors are convinced that “this time is different”.
But history often shows that while the capital market can be optimistic for a long time, it rarely manages to deviate from its fundamentals for an extended period.
For today's Korean stock market, AI and semiconductors undoubtedly provide a stronger industrial foundation. Different from the past, where reliance was solely on concept speculation, companies like Samsung Electronics and SK Hynix are indeed at an important position in the global AI industry chain. The growing demand for chips is gradually translating into corporate profits.
The problem is that, when industrial dividends have been priced in large quantities by the capital market in advance, the focus of the market shifts from whether there is growth to whether that growth can match the already rising stock prices.
Behind this is another old topic in the Korean capital market—“Korea Discount”.
According to the 'Korean Times', for a long time, Korean companies have had strong profitability. However, due to factors such as the capitalist structure of these companies, low shareholder returns, and insufficient realization of corporate value, the valuation of listed Korean companies has always been much lower than that of developed economies.
In recent years, the South Korean government has introduced the "Value-up Program" with the aim of improving corporate governance, enhancing shareholder returns, and attracting more international capital.
To some extent, the current rise in the stock market is the result of multiple factors working together: the AI trend has boosted the valuations of semiconductor companies; capital market reforms have improved investment expectations; and international funds are once again focusing on Korean assets. However, new questions arise: is Korea moving from a situation where it was 'undervalued in the past' to a market prosperity supported by a few industries and companies?
The Korea Development Institute (KDI) has repeatedly warned that the Korean economy relies heavily on the semiconductor industry. Changes in the global chip cycle will directly affect exports, investment, and even financial markets. Many analysts expect that if AI investments continue to expand, leading Korean companies may still benefit. However, if capital expenditures slow down or markets re-evaluate the valuation of technology stocks, concentrated funding could also amplify market fluctuations.
From the sixth circuit breaker in South Korean stock markets this year, to frequent warnings from regulators about leverage risks, and now the government begins to study ways to improve regulations on single stock leverage ETFs, this "bull market" driven by AI and semiconductors has entered a new stage.
For the current Korean stock market, the challenges may just have begun.
