SEOUL, July 06 (AJP) — As the KOSPI correction enters a third week, retail investors remain the primary buffer against relentless foreign selling, but much of their firepower is borrowed, raising questions about the durability of Seoul's record-setting bull market.
Outstanding margin loans and stock-backed lending averaged a record 61.98 trillion won ($39.8 billion) per trading day during the April-June quarter, exceeding the combined average daily trading value of 52.5 trillion won on the KOSPI and KOSDAQ over the same period, according to Korea Exchange (KRX) data.
Outstanding margin loans climbed 15.9 percent from the first quarter to a record 35.94 trillion won, while stock-backed loans — borrowing secured against shares investors already owned — remained virtually unchanged at 25.97 trillion won. The divergence suggests investors were increasingly borrowing to finance new stock purchases rather than tapping existing holdings for liquidity.
The surge in leverage coincided with one of the most extraordinary rallies in the history of South Korea's equity market. The benchmark KOSPI surged past the 5,000 level for the first time in January, broke above 6,000 in February, raced through both 7,000 and 8,000 in May and surpassed 9,000 for the first time in June.
The KOSPI has since retreated to just above the 8,000 mark as of Monday after weeks of record foreign selling.
The first-half rally was fueled by optimism surrounding artificial intelligence and South Korea's memory-chip industry, led by Samsung Electronics and SK hynix.
As prices climbed rapidly, fear of missing out drew more money into the market while early investors locked in profits, producing increasingly sharp swings in share prices.
The Korea Exchange said volatility interruption mechanisms, or VIs — temporary two-minute auctions triggered when individual stocks move too sharply — were activated 29,357 times during the first half of the year, the highest number ever recorded for a six-month period.
The previous record of 24,401 came during the first half of 2020, when markets were rattled by the COVID-19 pandemic.
The KOSPI's average intraday volatility reached 3.30 percent during the first half, the second-highest level on record after 3.51 percent in the first half of 1998.
Critics argue that retail trading has become increasingly speculative and selective since the launch of single-stock leveraged exchange-traded funds linked to Samsung Electronics and SK hynix, with the products' daily rebalancing amplifying market swings.
In a written response to Park Sung-hoon of the main opposition People Power Party, the Bank of Korea said additional investment in single-stock leveraged ETFs could deepen market concentration because Samsung Electronics and SK hynix already account for more than half of the KOSPI's market capitalization.
The central bank also warned that the daily rebalancing and arbitrage activities required by leveraged ETFs could intensify one-way trading and amplify price swings when investor sentiment shifts.
The warning marked a notable shift from the Bank of Korea's June 24 Financial Stability Report, which had concluded that single-stock leveraged ETFs would likely have only a limited impact on overall market stability. Less than two weeks later, however, the central bank warned that the products could deepen market concentration and amplify volatility.
Signs of overheating also appeared in regulatory data.
The Korea Exchange designated 43 stocks as "investment risk" issues during the first half, compared with just two a year earlier. Investment warning designations rose to 379 from 35, while investment caution notices jumped to 2,944 from 271.
The issue has also spilled into politics.
Ahn Cheol-soo of the main opposition People Power Party on Sunday criticized single-stock leveraged ETFs linked to Samsung Electronics and SK hynix, saying their daily rebalancing had amplified market volatility and turned the KOSPI into a "casino."
He called on regulators to consider delisting the products, noting that all 14 leveraged ETFs tied to the two chipmakers had posted negative returns over the past month, with losses reaching as much as 35.9 percent. He also urged President Lee Jae Myung to dismiss the country's top financial regulators over their approval of the products.
For brokerages, however, the leverage boom has proved highly lucrative.
Applying an assumed annual interest rate of 9 percent to average margin loans and 8.5 percent to stock-backed loans, securities firms are estimated to have generated about 1.36 trillion won in interest income from stock-related lending during the second quarter alone, up 8.7 percent from an estimated 1.25 trillion won in the first quarter.
Nearly 60 percent of that increase came from the expansion of margin lending, underscoring that brokerages benefited primarily from investors taking on new debt.
Outstanding margin balances have recently hovered around 38 trillion won as brokerages approach regulatory limits on total lending relative to their equity capital.
Several major firms, including NH Investment & Securities and KB Securities, have recently raised capital to expand their lending capacity, suggesting margin financing could continue to grow if retail demand remains resilient.
The figures point to a fundamental shift in Korea's bull market. It is no longer being driven solely by optimism over artificial intelligence or booming semiconductor earnings. Increasingly, it is being financed by borrowed money.
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