Following a series of sharp declines in the South Korean stock market, triggering circuit breakers twice, the government convened an emergency meeting on Wednesday to discuss measures to stabilize the market. The market downturn was not only related to sell-offs triggered by the earnings reports of leading chip manufacturers, but also reflected investor concerns about valuations in the AI industry chain and the risks of leveraged trading.
KOSPI continues to fall sharply
On Wednesday, the South Korean KOSPI index fell nearly 10% at one point, triggering a circuit breaker for the second consecutive trading day. Compared to its June high, the KOSPI has fallen by nearly 40%.
South Korean Finance Minister Koo Yoon-cheol apologized for market volatility during parliamentary questioning and admitted that regulators had failed to adequately review high-risk financial products. He subsequently convened a meeting with heads of major financial regulatory agencies to discuss contingency plans for stabilizing the market.
Chip stocks dragged down the index
The immediate pressure from this round of selling came from major South Korean chip stocks. Following SK Hynix's earnings report, although quarterly profits increased, the company raised its capital expenditures to $31 billion and failed to provide clearer explanations regarding shareholder returns and long-term contract pricing, thus weakening market sentiment.
Because SK Hynix and Samsung Electronics have significant weightings in the KOSPI, the simultaneous decline in their share prices amplified the index's drop. Market analysts believe that the South Korean stock market is heavily reliant on the chip sector, making it more susceptible to pressure during tech stock corrections.
Leveraged ETFs become the focus of controversy
In addition to earnings reports, investors are also reassessing the pace of global AI infrastructure investment. Amid growing concerns about the continued expansion of investments by companies like Nvidia and Meta, South Korean chip stocks are seen as a leading indicator of shifts in global AI trading sentiment.
During a parliamentary hearing, several lawmakers criticized the single-stock leveraged ETFs launched in May of this year, arguing that these products amplified volatility in blue-chip stocks and fueled speculative trading. The Financial Services Commission of South Korea stated that it is considering raising the bar for individual investors to participate in leveraged ETFs, including mandatory investor education and additional trading restrictions.
Retail investor deleveraging also exacerbated the market decline. Data shows that South Korean retail investors were net sellers of approximately 1.7 trillion won, or about $1.2 billion, on Wednesday. Market participants said that forced liquidation of margin buying positions was one of the reasons for the day's widening decline.
