Author: Kuri, Shenchao TechFlow

How crazy has the South Korean stock market been recently?

The KOSPI has risen from 4000 points to nearly 8000 points in half a year. According to the Chosun Ilbo, the staff restroom of a department store in Gangnam, Seoul, is always full by 3:30 PM, the closing time, with employees hiding inside to check the market.

As of mid-May, the balance of money borrowed by South Korean retail investors from brokerage firms for stock trading surged to a historic high of 36.47 trillion won (approximately 170 billion RMB), doubling in a year.

But in this frenzy, the source of the money is a bit strange.

According to the Korea Herald, the total amount of insurance policies canceled by the three major life insurance companies in South Korea in the first quarter was 4.9 trillion won (approximately 230 billion RMB), an increase of 16.3% year-on-year. Among them, savings-type life insurance saw a dramatic increase of 23.2% in cancellations.

Savings-type life insurance is originally a product designed to leave money for family. Canceling these policies guarantees a loss, as the cash value is below the premiums paid, yet more and more people are choosing to cash out at a loss.

Where is the canceled money going? Most likely into another stock account.

Data retrieved by South Korean lawmakers from the Financial Supervisory Service shows that by the end of the first quarter, retail investors in South Korea had borrowed 27 trillion won for stock trading from the top ten brokerage firms, with over 60% (62.3%) of the money borrowed by individuals over 50 years old.

The debt of those over 60 rose from 3.95 trillion to 8.02 trillion won in a year, the fastest increase among all age groups.

Cashing out insurance to buy stocks, an entire generation of South Koreans is leveraging their future money to speculate in the present.

Because of the bull market, are they borrowing money?

In a bull market, leveraging is called "amplifying returns," while in a bear market, it's called "accelerating to zero." South Korean seniors have already experienced a roller coaster ride.

In early March this year, the US and Israel jointly bombed Iran, causing panic in the global capital markets, and the South Korean stock market triggered trading halts for two consecutive days, with the KOSPI plummeting nearly 13%.

According to a report from the South Korean Financial Supervisory Service at the end of March, during that wave of declines, retail investors with margin loans lost an average of 19%, while those without lost 8.2%. Those who borrowed money to invest in stocks lost 2.3 times more than those who did not borrow.

Broke down by age group, the over-60 leveraged account group suffered the most, with an average return rate of -19.8%, the lowest across all age groups.

What’s even harsher is the forced liquidation.

Leveraged accounts have a liquidation threshold; when the stock value in the account falls below this line, the brokerage will sell without discussing it with you. At that time, the South Korean Financial Supervisory Service received a large number of complaints from retail investors, such as "My stocks were sold without my knowledge" and "I was charged exorbitant interest"...

A considerable portion of these complaints came from elderly people who were not familiar with trading rules. However, it should be noted that the retail investors who took on the risk during the March trading halt ultimately profited.

The South Korean stock market recovered all losses within two months and has continued to rise since then. Those who held their positions through March saw their accounts rebound, some of them even making a profit.

With volatility and potential for growth, this is a successful "ride" experience, even if it was funded by borrowing.

As a result, this successful experience will become the excuse for the next bolder investment. After the March trading halt, the margin loans for South Korean retail investors not only did not shrink but instead increased consistently. Public data shows that the total margin loan accounts surged to 25 trillion won by the end of April, setting a historical record; and by mid-May, it continued to rise to 36.47 trillion won.

In a month and a half, the entire South Korean retail sector borrowed another 11 trillion won (about 520 billion RMB).

On a personal level, at the beginning of May, a South Korean civil servant posted a screenshot in the workplace community Blind:

He had staked 2.3 billion won (approximately 170 million USD) into SK Hynix, with 1.7 billion borrowed from a brokerage. In other words, he had 600 million of his own funds and leveraged 1.7 billion.

Four days later, he updated, saying he had already made a profit of 267 million won.

On the same day, another 20-something employee of the Seoul subway posted saying that if she missed this wave, she would rather "totally collapse" than not go all in, using 150% margin financing to buy SK Hynix. The borrowed money was used as principal and borrowed again.

Such posts are discussed daily in the South Korean Blind community.

Regulators are also not unaware of the FOMO heat. At the end of March, the South Korean Financial Supervisory Service convened major brokerage firms to strengthen risk control, and some brokerages temporarily restricted new margin loans for overheated stocks. But the money that has already been loaned out is there, accumulating interest daily at an annual rate of 7% to 9%.

At an 8% interest rate, the total interest retail investors in South Korea would have to pay to brokerages in a year approaches 30 trillion won, approximately 14 billion RMB.

However, leveraging at 60 is different from leveraging at 30. A 30-year-old who faces liquidation still has decades of salary to recover. A 60-year-old facing liquidation might be risking their entire pension, leaving them only with exhausted strength and the reality of being unable to earn again.

If another trading halt occurs, there may not be a scenario of "recovering in more than two months" this time.

In Tower Bones Park, the elderly are exchanging information

Like all retail investors in South Korea, the elderly are also borrowing money and betting on Samsung Electronics and SK Hynix.

Samsung Electronics has risen 138% this year, while SK Hynix has risen 189%. The KOSPI overall has risen 80%, but excluding these two companies, the remaining stocks only saw a 30% increase.

These two companies together account for over 43% of the KOSPI index. In other words, as long as these two rise, the entire South Korean stock market will rise.

Most of the money borrowed by the elderly has flowed into these stocks. This year, a quarter of the net buying funds by South Korean retail investors went toward these two companies. The remaining three-quarters were spread across other stocks, but the overall increase in other stocks this year is only 30%.

There is a Tower Bones Park in the Jongno district of Seoul, one of the oldest public parks in the city. Young people rarely come here. The regulars are a group of retired elderly people, who come to the park every morning for free coffee, chatting, playing chess, with time flowing slowly as if it were standing still.

According to the Kyunghyang Shinmun, the topic in Tower Bones Park has changed this year.

During coffee breaks, one might hear, "My Samsung shares have risen again." Those playing chess might ask, "Did you buy into Hynix?" One 77-year-old gentleman told his middle school classmate that recently Samsung and Hynix have been doing well, and he has made some profits in his account.

A corner of Tower Bones Park, gathering many elderly people playing chess

Image source: Seoul News

However, he did not mention whether he borrowed money and how much he borrowed.

The topics popular among the elderly in the park surely did not come from nowhere; they resemble information exchanges at a village information station to some extent. For example, if an elderly person hears another has made a profit, the next day they might check their account. Then they may start trying to borrow a little. After that, they might borrow more and more.

But if you ask why elderly South Koreans are appearing in leveraged stock accounts, it actually relates to their retirement security.

According to OECD data, the relative poverty rate among those aged 65 and over in South Korea is about 40%, the highest among OECD member countries. The replacement rate of the National Pension (South Korea's version of pension) has long been low, averaging around 50% in OECD countries and only about 31% in South Korea.

The labor participation rate for those aged 65 and over is, conversely, the highest among OECD countries, which means many elderly South Koreans need to continue working after retirement.

Therefore, there is free coffee available in Tower Bones Park, which is essentially a form of social relief in South Korea. A cup of coffee costs less than 500 won, which is part of daily生活 for an elderly person whose monthly pension is less than a thousand dollars.

However, the elderly in Tower Bones Park are not just there to drink free coffee and play chess now. They might also be tracking the KOSPI on their phones.

Since President Lee Jae-myung took office, he has been advocating for universal stock investment. He publicly calls himself a "big ant," with "ant" being a colloquial term in South Korea for retail investors. He has set a policy goal of pushing the KOSPI to surpass 5000 points.

In other words, the act of elderly people borrowing money to buy stocks is, to some extent, officially encouraged in South Korea.

The genuine bet that elderly people are making is one of anxiety. If they don’t get on board now, they may miss the opportunity.

This is their last chance before retirement. The South Korean semiconductor industry is cyclical, having experienced more than one dramatic rise and fall over the past thirty years.

SK Hynix is facing a loss of 4.26 trillion won in 2023, its worst performance in ten years. In two years, the company went from huge losses to a quarterly operating profit margin of 72% (surpassing Nvidia); the speed of this cyclical transition itself reminds us that the cycle could turn back.

And time, for these elderly investors who are borrowing to trade stocks, may indeed be the most precious thing.

The elderly in Tower Bones Park are striving to seize the version bonus. The coffee is still free. The market trends on their phones have not stopped for a moment.