SEOUL, May 28 (AJP) -For a full year, the Bank of Korea sat motionless on a 2.50 percent benchmark while the KOSPI staged the most spectacular rally on the planet — up more than 93 percent since year-end, briefly flirting with 8,450 before Wednesday's close.
On Thursday, the central bank's new governor finally said out loud what the bond market had been bracing for: the only questions left are when, how fast, and how far rates rise. A plain-spoken siren to the leverage crowd.
New governor Shin Hyun-song could hardly have been blunter in his first rate-setting meeting and media briefing.
"All the signs — price pressure, the growth trajectory, the exchange rate and the real estate market — point in one clear direction," he said, calling the case "exceptionally clear." A new governor living up to a hawkish reputation on day one is, in itself, a market event. But the substance behind the posture is what should sober up a frenzied retail base.
The freshly released six-month dot plot tells the story with unusual candor. Ten of the 21 projected policy-rate dots now cluster at 3.00 percent, seven at 2.75 percent, and two reach 3.25 percent — leaving only two laggards still betting on a hold at 2.50.
Rewind to February, when 16 of 21 dots saw no change and four saw a cut, and the reversal is nothing short of dramatic. The BOK simultaneously revised up both growth and inflation forecasts, citing stronger-than-expected chip demand, the prolonged Gulf crisis, and an extraordinary terms-of-trade windfall that lifted first-quarter gross domestic income 12.3 percent year on year.
Here is the uncomfortable part Shin was unusually willing to name: the boom is feeding on itself. Earnings and stock gains are spilling into wages and bonuses, adding to price pressure — and the rally has been bankrolled, dangerously, on leverage. Margin trading balances stood at 36.7 trillion won, up a startling 34 percent since the start of the year. "The capital losses from highly leveraged, debt-fueled trading are ultimately borne by market participants who do not carry debt," Shin warned.
"This behavior distorts the normal economic demand curve." Translated from central-bank diction: the party financed on credit will hand the bill to everyone, and the BOK would rather deflate the foam now than clean up after it bursts.
And the data show that bill is already coming due for the most over-extended traders.
According to a think tank affiliated with the Korea Financial Investment Association, the forced-liquidation ratio — the share of margin debt that ends up dumped onto the market when investors fail to meet collateral calls — breached its 2 percent warning line on 20 of the 122 trading days between Nov. 22 and May 22.
In stable conditions that ratio hovers near 1 percent; that retail investors were force-sold on roughly one of every six sessions is a sign the leverage has turned from accelerant into liability. The damage clustered in March and May, with nine days above the threshold in March and seven in May.
The ratio blew through the severe 4 percent level five times, peaking at 7.6 percent on May 20 — when 145.8 billion won of stock was liquidated against 1.64 trillion won in outstanding margin credit — followed by 6.5 percent on March 5, 6.0 percent on May 18, 5.4 percent on May 11 and 4.6 percent on May 19.
The deterioration is stark against history. In the six months to November 2024 the ratio topped 2 percent just three times; in the half-year before that it never did, peaking at a mild 1.8 percent. Now the average daily ratio has nearly doubled to 1.45 percent, from a prior 0.6-to-0.8 percent range, while average daily forced liquidations have tripled to 17.33 billion won from 5-to-8 billion won.
And those figures capture only brokerage margin credit — they exclude margin loans, stock loans and contracts for difference. Brokerage margin loan balances alone have nearly doubled to about 36 trillion won as of Wednesday from 18.5 trillion a year ago; stock-collateralized loans have climbed to 25.7 trillion won. The true exposure to a forced-selling cascade is almost certainly larger than the headline numbers suggest.
The market got the message in real time. Bond prices collapsed — the three-year government yield jumped 5.5 basis points to 3.766 percent and the ten-year rose 4.5 to 4.147 percent, both at roughly 15-year highs not seen since the 2011 eurozone crisis.
Equities convulsed: the KOSPI plunged more than 4 percent intraday, briefly breaching the psychologically critical 8,000 line, before clawing back to close at 8,185.29, down just 0.53 percent on bets that a "healthy" hike won't derail the chip story. The KOSDAQ, with thinner semiconductor cover, found no such floor, shedding 2.54 percent to 1,104.36 after diving more than 5.7 percent at its worst. The won slid 5.1 to 1,507.10 per dollar — and Shin made clear he "will not tolerate disorderly herd behavior" there either.
That split-screen — bonds breaking, stocks half-recovering on chip faith — is precisely the imbalance worth worrying about. The rally has never been broad. On Wednesday, with the index near a record 8,330, decliners crushed gainers 826 to 75. A market this narrow, this concentrated in Samsung Electronics and SK hynix (whose combined weighting topped 50 percent intraday), is structurally fragile, and the leverage layered on top makes it brittle.
And that leverage keeps finding new outlets. Just this week, sixteen single-stock leveraged and inverse ETFs tied to the two chip giants debuted to roughly 10.4 trillion won in first-day turnover, pushing Korea's total ETF market past 500 trillion won for the first time.
Investors who watched the chip rally from the sidelines are now chasing it with amplified, FOMO-driven exposure — even as a record 258.65 trillion won sits parked in money market funds and the VKOSPI clings to panic-adjacent territory above 70.
That is the psychology of a market simultaneously greedy and terrified: a textbook late-cycle signature. As one Korea Investment & Securities analyst warned, when leverage accumulates this far, "massive volumes of forced liquidations can hit the market with a time lag" — amplifying volatility precisely when investors can least afford it.
None of this means the chip thesis is wrong. Samsung and SK hynix posted combined operating profits north of 90 trillion won, and Nomura and others have lifted KOSPI targets toward 10,000 and beyond.
But valuation built on real earnings is one thing; a record index propped up by borrowed money and 5-to-6 percent daily swings is another. Shin's hawkish turn is, at bottom, an attempt to normalize asset prices before the foam hardens into a bubble — and bubbles, unlike rallies, do not get to choose how they end.
The governor framed the dissent on his board as "strategic — about timing rather than direction." That is the whole point. Direction is no longer in doubt.
The dots have moved, the bonds have repriced, and the man holding the gavel has shown his hand on his very first day. For the leveraged longs still dancing to the chip rally's tune, this was the clearest reality check yet: it is simply a matter of time.
*The author is the managing editor of AJP.
Copyright ⓒ Aju Press All rights reserved.