Original｜Odaily Planet Daily（@OdailyChina）

Author｜Wenser（@wenser2010）

Unexpectedly, before the KOSPI index of South Korean stocks reached a new high, it might be the South Korean central bank raising interest rates!

According to foreign media reports, sources reveal that the market generally expects the South Korean central bank to raise interest rates by 25 basis points at its monetary policy meeting tomorrow, increasing the benchmark interest rate to 2.75%; if this is the case, it will be South Korea's first interest rate hike since January 2023, after about three and a half years. Moreover, bond market experts predict that there will be further rate hikes this year, with the benchmark interest rate reaching 3.00% by the end of the year and 3.25% in the first half of next year.

For a time, although the KOSPI index violently rebounded today, it still triggered a certain degree of market panic. In addition, due to the sharp fluctuations of ETFs based on SK Hynix, Samsung Electronics, and other companies, South Korean brokerages plan to increase the minimum margin requirements for single-stock leveraged ETFs fivefold.

A month ago today, South Korean girls cheered "the golden age of humanity has arrived" due to a surge in the stock market; now, a month later, will the South Korean market enter a crisis era due to liquidity tightening and higher entry thresholds?

The South Korean stock market receives extensive attention: from the president to securities firms, from the central bank to financial regulatory bodies

The consecutive surges and drops in the stock market have driven the South Korean citizens, known as a "nation with natural leverage," into a frenzy. On July 13, there was even an incident in Busan, South Korea, where a “investment KOL was attacked by an emotional fan due to financial losses.”

This crazed and extreme speculative fervor has attracted the attention and discussion of South Korean society, from President Lee Jae-myung to Financial Investment Association President Hwang Seong-yeo and the CEOs of ten large asset management firms in South Korea; from the South Korean central bank to central financial regulatory bodies, everyone is revolving around "stocks," "securities," and "financial markets."

South Korean President Lee Jae-myung: The stock market needs time to stabilize after a sharp rise

Today, South Korean President Lee Jae-myung stated during a policy meeting with senior government officials in Seoul that "the domestic stock market is currently quite unstable. As the market has experienced an unprecedented surge in such a short period of time, it requires time and a certain degree of volatility to stabilize."

Regarding the controversies surrounding leveraged ETFs, Lee Jae-myung acknowledged that they indeed exist and has urged the South Korean Financial Supervisory Service and the heads of the Korea Exchange to rapidly address the relevant issues and develop follow-up measures.

Market participants expect that regulatory bodies will take action to curb the impact of such high-risk products on market stability, including possibly increasing the minimum margin requirements for investing in leveraged ETFs. The largest opposition party in South Korea, the People Power Party, accused the Lee Jae-myung government on Tuesday of proposing ambitious stock market targets while ignoring the accumulating leverage risks, thus encouraging excessive risk-taking behavior.

Previously, influenced by the global AI industry chain and semiconductor industry boom, the South Korean government had proposed an “800 trillion won chip factory investment plan”, and plans to invest at least 30 trillion won in the chip sector over the next 15 years. Just half a month later, the KOSPI index, including SK Hynix and Samsung, experienced consecutive circuit breakers, causing the "glory of semiconductors" that once made the South Korean government and the entire nation proud to dim significantly.

However, from the perspective of market rules, after a rapid increase, there must be a sharp decline. The South Korean government promoting its domestic industry development and long-term construction is also justified; it is just a matter of who bears the cost and who achieves the results in the construction process.

South Korean brokerages: plan to raise the minimum margin for single-stock leveraged ETFs to

According to the Korea Herald report, the South Korean brokerage industry has agreed to tighten investor protection regulations for single-stock leveraged ETFs.

On Tuesday (July 14), the Korea Financial Investment Association convened an emergency meeting with the CEOs of major brokerages to assess the market situation of leveraged ETFs tracking Samsung Electronics and SK Hynix and discuss countermeasures. The attending institutions generally agreed to raise the minimum margin requirements to curb excessive leverage use by retail investors. Currently, one proposed plan is to raise the minimum margin threshold from 10 million won (approximately 6,714 USD) to 50 million won (approximately 33,570 USD).

All institutions also agreed to provide more targeted risk alerts based on the investors' age and portfolio situation, and to strengthen investor education to help them better understand the structure and risks of such products. Additionally, the industry agreed to evenly distribute rebalancing and hedging transactions throughout the trading session to reduce market impact caused by concentrated buying and selling before the close.

South Korean central bank: may raise rates by 25 basis points this Thursday, tightening cycle about to begin

According to BigGo Finance reports, financial insiders have revealed that the market generally expects the South Korean central bank to raise interest rates by 25 basis points at its meeting this Thursday, increasing the benchmark rate from 2.50% to 2.75%. This will be the first rate hike since January 2023 and is likely to mark the beginning of the tightening cycle.

Bond market experts predict that there will be further rate hikes this year, with the benchmark interest rate reaching 3.00% by the end of the year and 3.25% in the first half of next year, which means borrowers should prepare for a rate increase lasting at least a year.

A rate hike by the central bank itself is a signal of controlling market liquidity. Because this means—

• Margin loan rates rise, investment loan costs rise sharply;
• The holding costs of existing leveraged funds and investments surge, previously bought stocks with leverage may have to sell part to obtain liquidity;
• Higher capital costs further transmit to the leveraged trading side, new leveraged funds will further shrink;

From August 2021 to January 2023, during the last round of the South Korean rate hike cycle, the KOSPI index first surged to nearly 3,000 points, then fell below 2,300 points, a drop of nearly 25%. Now, the low point for the KOSPI index in the past year is around 3,080 points, but its high point has risen to 9,385 points, with a cumulative increase of over 204%. Data from JPMorgan shows that the KOSPI index has surged by 109% year-to-date, outperforming the global market (the S&P 500 increased only 11% in the same period).

But as mentioned earlier, the major components in single leveraged ETFs—Samsung Electronics and SK Hynix—together account for about 43% to 50% of the KOSPI weight, and this "mad cow-style surge" has never really represented a flourishing phenomenon but rather a malnourished false prosperity.

On the other hand, retail investors are also beginning to feel the pressure from both the central bank and leveraged assets.

Retail investors under pressure: foreign investors have sold over 110 billion USD in assets this year; Korean retail investors bear the brunt

According to Goldman Sachs data, foreign investors in the South Korean financial market have net sold 110 billion USD in assets this year, five times the previous seven-year high of 22 billion in 2021; in June alone, they sold 31 billion USD in assets, setting a new monthly historical high.

On the other hand, Korean retail investors are accelerating their purchases: after buying 42.4 trillion won in June, Korean retail investors have net bought 13.2 trillion won in KOSPI index stocks this month. As of July 14, the balance of financing used by retail investors for KOSPI stocks was 28 trillion won, having previously reached a historic high of 29.8 trillion won on June 24.

Meanwhile, retail investors, who rely mainly on financing trading and leveraged funds, are also facing risks related to capital restrictions.

The Financial Services Commission and the Financial Supervisory Service of Korea announced data showing that as of the end of June, the balance of financial industry stock loans associated with online investments was 898.3 billion won, an increase of 374.5 billion won in the first half of the year. Compared to the 351.3 billion won at the end of last year, this represents a surge of 71.5% within half a year.

In response, the Financial Supervisory Service will issue management targets to online investment financial companies, requiring that the monthly increase in stock loan size should not exceed 30% of the previous month's increase in associated loans. This new management measure will take effect immediately from August 16. Furthermore, to prevent online investment financial companies from overly concentrating on stock lending businesses and causing risk accumulation, regulatory bodies stipulate that the stock loan limit for a single borrower should generally not exceed 1 billion won. However, if a company can keep its stock loan balance at the end of each month after July within the balance level at the end of June, it can be exempted.

In summary, regulatory bodies are controlling retail investors' leverage levels from the source of funding to avoid further fueling the emergence of stock market bubbles.

In conclusion, South Korean government agencies are implementing four strategies: "closing the floodgates, limiting loans, raising thresholds, and cooling down" to address the risks associated with the rapidly rising and falling, structurally imbalanced, and bubble-accelerating stock market.

As for whether the interest rate hike will sound the first whistle for the downward trend of the stock market this year, we will still need to observe how the market reacts tomorrow.

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