Author: Gelong

The dust of the U.S. midterm elections has settled, with the Democratic Party's “blue wave” sweeping both houses of Congress, and they also took control of the governor's mansions in key states like Texas and Georgia, major hubs for AI data centers.

The global AI computing sector fell as a result, with bloodshed in Nasdaq chip stocks and declines in the Nikkei, while A-shares and Hong Kong stocks were not spared either.

Interestingly, after the fall, the reactions of various governments were not on the same level.

Markets dropped, yet there were no emergency meetings held, nor did important officials make any statements.

Only South Korea responded with urgency, as the Deputy Prime Minister and Minister of Finance convened an emergency market meeting, with the Chairman of the Financial Committee in attendance, and the Deputy Governor of the Bank of Korea accompanying him, announcing afterward: the broker credit financing guarantee ratio of 140% is maintained, with three months of exemption.

On the same day, the Korean Exchange activated the Sidecar circuit breaker mechanism, halting programmatic sell orders.

Why did South Korea react so nervously?

Can’t Handle It?

Let's look at a set of data.

According to statistics from KOSCOM, a subsidiary of the Korean Exchange, just one month before the crash, from October 6 to November 5, South Korean individual investors net bought Samsung Electronics for 58.3 trillion won and net bought SK Hynix for 33.6 trillion won.

These two figures rank first and second among all listed stocks and ETFs in South Korea.

Pay attention to the time window!

This isn't the trend chasing when the AI frenzy started at the beginning of the year, this is bottom-fishing on the eve of the crash.

On November 5, the KOSPI had already fallen by 5.28%, yet retail investors continued to rush in.

The next day at the opening, the KOSPI directly broke through the 5000-point mark.

What kind of money is this?

The term used by South Korean media is:ant army.

Behind it, a lot of it is borrowed money.

South Korean retail investors are known globally for their aggressive leverage, with single stock leverage ETFs being their most convenient tools.

This July, the Financial Committee of South Korea was pushed to take action:

The margin threshold for single stock leverage ETFs was abruptly raised from 10 million won to 30 million won, new product launches were suspended, and advertising was banned.

By August, they intensified the measures:

New entrants wanting to use leveraged ETFs must first do a 5-day simulation and accumulate 5 hours of trading, otherwise they will not be allowed to open an account.

The urgency shown by regulators in July indicates what?

It indicates that retail investors’ leveraged positions have grown so large that even the authorities are fearful.

Data from the Korean Capital Market Research Institute is more straightforward:

By mid-June, individual investors had cumulatively net bought single stock leverage ETFs amounting to as much as 82 trillion won, accounting for 60% of the management scale of these products.

In other words, 60% of the money in leverage ETFs comes from retail investors.

Then, that wave of declines in July saw the 14 individual stock leverage ETFs tracking Samsung and Hynix decrease in management scale directly from 159 trillion at the end of June to 93 trillion, evaporating by 41%.

Four leading products lost 8.8 trillion won in valuation in less than two weeks.

This is not just a correction; this is leverage being buried alive.

Above retail investors, there is another layer.

The National Pension Service of Korea, the world's third largest sovereign pension fund, represents the retirement money of the Korean people.

How heavily is it invested in Samsung and Hynix?

As of October 15, the NPS held more than 5% in 287 listed companies, with the value of holdings dropping from 515 trillion won at the end of June to 333 trillion, a decline of 182 trillion, equivalent to about 137 billion USD.

The KOSPI had just set a historical closing high of 9114 points on June 22, but by mid-October it had already fallen by 39%, and the NPS had held on all the way down, without being able to escape.

Thus, the situation the South Korean government faces is:

Millions of retail investors rushing in with leverage at high points, while the national pension fund is heavily locked into the same stocks, and a few stocks take up half of the KOSPI’s market value.

At this moment, news from the U.S. stated that the Democrats were going to restrict power and approvals for data centers, suggesting a slowdown in the expansion of AI computing power, and stock prices were unable to hold up, leading to a negative chain reaction.

If this chain reaction is not stopped in time, the next step would be a liquidity run.

The South Korean government’s exemption of broker guarantee ratio obligations is aimed at cutting off this cycle.

Why?

The South Korean stock market is not just a capital market; it is also an amplifier of social sentiment.

The phenomenon of all South Koreans trading stocks is well-known worldwide.

Since the beginning of this year, due to precisely hitting the boom of AI storage chips, millions of ordinary South Koreans have bet their years of saved wages, wedding money, and even borrowed funds on two of the national stocks.

However, this sentiment in the political logic of South Korea carries a high risk.

South Korean politicians understand better than anyone that, once the stock market crashes, the resulting tsunami of public opinion is more direct than any diplomatic crisis.

There is another layer, which is the South Korean won.

South Korea is a small open economy, and the won is not a safe-haven currency.

During global risk-off times, foreign capital exits the South Korean stock market faster than anyone else, and when they withdraw, they also sell the won and buy dollars, causing the exchange rate to plummet.

South Korea relies on imports for energy and raw materials; when the won depreciates, imported inflation immediately rises.

The combination of falling stock market + depreciating currency + rising inflation is deadly for an economy the size of South Korea.

There is an additional layer of logic: the importance of foreign capital in the South Korean stock market.

By June 2026, foreign capital held approximately 37.8%-38.9% of the total market value of the South Korean stock market, with American investors accounting for about 42% of foreign holdings.

Core technology stocks like Samsung Electronics and SK Hynix have long had foreign ownership exceeding 60%, dropping to about 46.70% and 50.84% respectively by early August, and only by early October did it drop to 46.38% and 49.59%.

The reliance on foreign capital is even exacerbated at the trading scale.

By October 14, foreigners had cumulatively net sold about 203.7 trillion won in the mainboard market of South Korea this year, with Samsung Electronics and SK Hynix being net sold for about 176 trillion won, accounting for 86% of total foreign selling.

Foreign investors have withdrawn around 131 billion USD from the South Korean stock market this year, the largest among major Asian markets.

Domestic funds in South Korea are limited, and without support from foreign capital, it is hard to achieve the crazy rise of the first half of this year; but when foreign capital can enter, it can also exit, as South Korean stocks are merely an arbitrage arena, not a final destination.

More seriously, the sensitivity of retail investors and institutions in South Korea is slower compared to foreign capital; the latter can set up positions during market lows, while the former usually enters after the market has already risen, and when foreign capital withdraws, they become the high-position buyers.

Therefore, when South Korean government officials make statements, they are not just speaking to retail investors, but also to foreign capital:

Don't run, there is no problem with the fundamentals; we can absorb it!

Deep-Level Explosion

Ultimately, the U.S. midterm elections are just a match; the structure of the South Korean economy is the fundamental reason for the uncontrollable fire.

In comparison, Japan has automobiles, precision machinery, and comprehensive trading companies; if the Tokyo Stock Exchange index falls, Toyota and Sony will not collapse together.

The U.S. has the world’s largest internal market and technology ecosystem; even if the Nasdaq drops, the stock prices of Apple, Microsoft, Google, and Meta will not be halved simultaneously.

As for South Korea?

It has other industries, but its dependence on semiconductors is simply too great.

In 2025, South Korea's semiconductor exports amounted to 173.4 billion USD, making up 24.4% of its total exports.

In January 2026, South Korea's semiconductor exports first surpassed 30% of total exports, reaching 31.2%.

By May, this figure surged to 42.3%, setting a historical high.

In early October, the proportion of exports accounted for by semiconductors further approached 47%.

In other words, South Korea's export growth is almost entirely supported by chips, while all other categories combined are declining.

Delving into finer data, within South Korea's semiconductor exports, memory chips account for 75%, while system semiconductors only make up 20%, and wafers and components account for 5%.

Another piece of data concerns GDP growth.

In the third quarter of 2026, South Korea's GDP grew by 1.0% quarter-over-quarter, nearly three times the earlier prediction from the central bank; computer and electronic devices, including semiconductors, contributed to about 60% of this GDP growth, with 50% coming from the semiconductor industry.

Half of a country's quarterly economic growth comes from a single industry.

Additionally, this industry’s products are highly concentrated in memory chips, with customers primarily being American tech giants, and demand closely tied to the AI capital expenditure cycle.

According to Morgan Stanley's data, the proportion of automobiles in South Korea's exports to the U.S. dropped from 36% in 2024 to 13%, while the proportion of semiconductors surged from 10% to 28%.

Morgan Stanley even directly termed South Korea's exports to the U.S. as a leading indicator of American AI investment, stating that Korean exports lead U.S. equipment investment indicators by one to two months.

The tighter this binding, the greater the shock in South Korea when U.S. policies shift.

Conclusion

Both are encountering policy headwinds and significant stock market declines.

But look, in other markets, declines are just declines; trading continues, hedging happens.

Only in South Korea do we see a downturn lead to emergency meetings by the Deputy Prime Minister, public statements by the Financial Committee, the exchange cutting off trading, and brokers being mandated not to close positions.

This is not market rescue; this is fire fighting.

The result of overly betting on a single export industry is that a U.S. sneeze can lead to a heavy cold in South Korea.

Moreover, this time the U.S. isn't just sneezing; it's directly kicking at the vital point of AI infrastructure.

If South Korea isn’t panicking, who is?

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