A recent thematic analysis delved into the sharp downturn in the South Korean stock market, which saw 37 trading halts and 8 circuit breakers in July, triggering margin calls for 1.2 million investors and wiping out 320,000 accounts. The core issue driving this market correction is not corporate profitability. Long-term industrial trends such as AI capital expenditure and the high-bandwidth memory (HBM) and storage sector cycle have not fundamentally reversed. Instead, the primary cause of the market's sudden deceleration was the excessive, rapid, and overly concentrated leverage that had built up previously. The South Korean market is highly concentrated in Samsung Electronics Co Ltd and SK Hynix Inc, with these two memory chip giants accounting for approximately 54% of the KOSPI index's weighting. Furthermore, the scale of leveraged funds in the market is substantial.

On one hand, the market has seen a significant issuance of double-leveraged exchange-traded funds (ETFs) tied to single stocks. On the other hand, retail capital entering the market may have been leveraged through collateralized loans or borrowing, with some investors further employing options for multiple layers of leverage. This structure makes the South Korean market highly sensitive to liquidity, with the primary risk being whether the market can continue to access funding internally. The recent sharp and rapid decline is largely attributed to this deleveraging behavior.

The KOSPI index can be likened to a speedboat in rough seas, while markets like the US, China A-shares, and Hong Kong are larger vessels. The waves created by the speedboat's high-speed maneuvers can also affect risk appetite in other core equity markets. The extreme leverage employed by Korean investors has created significant turbulence that risks unsettling other market participants.

Evaluating Deleveraging Pressure

Data from the Korea Financial Investment Association (KOFIA) provides insights into the market's status from three perspectives: financing leverage, off-market cash awaiting entry, and short-selling and institutional positioning activity.

Financing Leverage Positions

The reduction in core financing positions has been limited. Firstly, credit transaction financing balances, which determine the risk of retail investor margin calls, peaked at 38.63 trillion won on June 24th. By July 10th, they stood at 35.57 trillion won, a decrease of only 7.9% from the peak. Secondly, securities collateral loans fell from 28.08 trillion won to 25.24 trillion won, a decline of 10.1%. Thirdly, credit transaction securities lending balances dropped from 583 billion won to 255 billion won, a significant 56.3% fall, though the absolute size remains small.

Off-Market Cash Awaiting Entry

The cash buffer has contracted. Client deposit balances in securities accounts reached 139.69 trillion won on June 4th but fell to 105.58 trillion won by July 10th, a reduction of 24.4%. Exchange derivatives investor deposits decreased from 64.22 trillion won to 51.60 trillion won, down 19.7%. The rate of decline in these cash buffers is notably faster than that of credit financing balances, indicating that retail investors are not merely reducing leverage but are also depleting the cash reserves that could be used for topping up positions or meeting margin requirements.

Active Short Positions

New short-selling activity is not excessively crowded. The balance of borrowed shares peaked at 3.191 billion shares on April 3rd and was 2.941 billion shares as of July 13th, down 7.8% from the high. The value of borrowed shares reached a high of 195.30 trillion won on June 15th, with the latest figure at 152.77 trillion won, a decline of 21.8%. Both metrics are currently below their peaks, suggesting that pressure from active short-selling is not particularly pronounced. The current adjustment is primarily due to the unwinding of previously established leveraged positions.

Signs of a Market Bottom

Determining when the decline might conclude involves several factors. First, observing whether technical selling pressure has exhausted itself. Second, monitoring whether the cash buffer can stabilize. Third, assessing whether foreign capital and the fundamental performance of the semiconductor sector (core stocks) can provide subsequent support. Fourth, watching for regulatory intervention to proactively break the negative feedback loop. A genuine end to the South Korean market adjustment is more likely to occur after financing balances show a sustained decline, client deposit outflows cease, and semiconductor earnings expectations begin to improve again. For now, the market remains in a waiting phase.