The South Korean stock market innovation that has drawn the most attention is turning into a headache for President Lee Jae-myung.

Market enthusiasm for South Korean stocks peaked in May, leading to the launch of single-stock leveraged ETFs. These products offered investors double the daily return of chip sector leaders Samsung Electronics Co Ltd and SK Hynix Inc. Subsequently, they faced criticism for amplifying volatility in South Korea's flagship AI stocks, and the benchmark Kospi index has fallen about 26% from its June peak. The Korean market was closed for a holiday on Friday and reopened Monday, with early trading seeing a drop of up to 4.5%.

This situation strikes directly at the core of Lee Jae-myung's political brand. Having previously promised to unlock shareholder value and transform South Korea into a premier investment destination amid widespread optimism, he now faces growing criticism that the stock market is overly speculative and increasingly resembles a casino.

This is unfolding against a backdrop of rapidly deteriorating conditions for chip stocks. Global semiconductor shares fell sharply on Friday as the unwinding of crowded momentum trades heightened concerns about future demand for advanced chips, increasing the risk of further declines in South Korea's AI-heavy market.

Politicians from both the ruling and opposition parties have raised concerns about these leveraged products, and a public petition urging government intervention has garnered over 35,000 signatures. Regulators responded on July 16th by suspending new listings of leveraged ETFs and tightening trading rules. This controversy threatens to overshadow one of Lee Jae-myung's signature achievements: the stock market recovery.

"For Lee Jae-myung himself, the challenge is to support South Korea's AI development agenda while avoiding the boom-bust cycles driven by retail investors," said Gary Tan, a portfolio manager at Allspring Global Investments. "Investor sentiment remains crucial."