Guangfa Strategy: South Korean stock market enters the early stage of deleveraging, risks are far from clear According to a report by Golden Finance on July 21st, Guangfa's strategy team believes that the current round of KOSPI decline presents characteristics of "low valuation and high panic". The index retreated significantly from the high point in June, but the valuation is still at a historical low, indicating that the decline is not mainly driven by the valuation foam, but the risk is more from the over concentration of Samsung Electronics and SK Hynix, as well as the market's concern about AI's capital expenditure, storage boom and earnings sustainability. The leverage of the South Korean stock market mainly comes from credit financing, leveraged ETFs, and on market and off market derivatives. Different instruments have significant differences in investment subjects, transmission mechanisms, and risk transparency. At present, the scale of domestic leveraged ETFs in South Korea has decreased by 28.3%, and credit financing has only fallen 9.3% from its peak, still in the early stage of deleveraging. On exchange derivatives are still at historical highs, indicating that leverage clearance is gradually transmitted from the leveraged ETF end to the financing and derivatives end. The current KOSPI deleveraging has been initiated, but the progress of clearing credit leverage and trading structure leverage is clearly differentiated. The expansion of the scale of leveraged ETFs is the main source of impact for the current round of capital increase in leverage. Currently, local retail investors in South Korea have shown signs of a slight rebound in net subscriptions after a significant drop in redemptions in the early stages. Historical experience has shown that leveraged liquidation usually goes through a process of "rapid release in the first round, leveraged replenishment in the rebound, multiple rounds of oscillation and elimination, and return to historical averages", which may last for about a year. Considering that South Korea's credit financing and derivative deleveraging are still insufficient, and ETF funds have experienced phased returns, it cannot be determined at present that this round of deleveraging has ended. Overall, KOSPI is still in a stage of deep price adjustment and initial release of leverage, but has not yet formed a systemic liquidity crisis. The current proportion of uncollected funds for forced liquidation is still within the normal range, indicating that there have been no large-scale payment failures or passive liquidation on the retail end; However, the coexistence of foreign investment and institutional reduction of positions, retail investors taking over, and leveraged funds flowing back has put the market in a relatively unstable period of chip redistribution. In the future, we should focus on observing three risk transmission chains: first, the expansion of net outflow of foreign capital and the weakening of individual investors' acceptance, which will drive the market from chips to incremental sales; Secondly, leveraged ETFs have shifted from contrarian subscription to downward redemption; The third is the simultaneous deterioration of credit financing, derivative margin, and outstanding balance, which may cause local adjustments to evolve into active and passive deleveraging resonance.