황금시대인가 위기의 시대인가? 한국은행 기준금리 인상 임박, 증권사 증거금 5배 인상 추진

Original｜Odaily Planet Daily (@OdailyChina)

Author｜Wenser (@wenser 2010 )

Unexpectedly, what may arrive before the KOSPI index hits a new high is a rate hike from the Bank of Korea!

According to foreign media reports, sources have revealed that the market widely expects the Bank of Korea to raise its benchmark interest rate by 25 basis points to 2.75% at its monetary policy meeting tomorrow; if this is confirmed, it would be the first rate hike since January 2023, marking the end of a roughly three-and-a-half-year pause. Furthermore, some bond market experts predict further rate increases within the year, with the benchmark rate reaching 3.00% by year-end and climbing to 3.25% in the first half of next year.

Consequently, despite a sharp rebound in the KOSPI index today, market panic has been somewhat ignited. Additionally, due to significant volatility in ETFs tracking stocks like SK Hynix and Samsung Electronics, Korean brokerages are planning to raise the minimum margin requirement for single-stock leveraged ETFs fivefold.

A month ago today, South Korean girls were celebrating the stock market surge, proclaiming the arrival of a "Golden Age for Humanity." A month later, the Korean market may be entering a period of crisis due to liquidity tightening and higher barriers to entry.

All Eyes on the Korean Stock Market: From the President to Brokerages, Central Bank to Financial Regulators

The successive surges and crashes have driven South Koreans, often called a "nation built on leverage," into a frenzy. On July 13, an incident occurred in Busan where an investment KOL was stabbed by a fan who had become emotional due to financial losses.

This extreme speculative frenzy has sparked widespread discussion and concern across Korean society, from President Lee Jae-myung to the Chairman of the Korea Financial Investment Association, Hwang Seong-yeop, and the CEOs of 10 major asset management companies; from the Bank of Korea to the central financial regulatory authority, everyone is focused on "stocks," "securities," and the "financial market."

President Lee Jae-myung: Stock Market Needs Time to Stabilize After Rapid Rise

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

Regarding the controversy surrounding leveraged ETFs, Lee acknowledged its existence and urged the heads of the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) to promptly address related issues and formulate subsequent countermeasures.

Market analysts expect regulators to intervene to mitigate the impact of these high-risk products on market stability, potentially by raising the minimum margin requirements for investing in leveraged ETFs. On Tuesday, the main opposition People Power Party criticized the Lee administration for encouraging excessive risk-taking by proposing ambitious stock market goals while ignoring the accumulating leverage risks.

Earlier, influenced by the global AI industry and semiconductor boom, the Korean government had unveiled an "800 trillion won investment plan for chip factories" and plans to invest at least 30 trillion won in the semiconductor sector over the next 15 years. Just half a month later, the circuit breakers on the KOSPI index, triggered by heavyweights like SK Hynix and Samsung, significantly tarnished the "glory of the semiconductor industry" that the government and the nation had been so proud of.

However, following market logic, a sharp rise is inevitably followed by a sharp fall. The government's push for domestic industrial development and long-term construction is also necessary. The only question is who will bear the cost and who will reap the rewards during this process.

Korean Brokerages: Propose Raising Minimum Margin for Single-Stock Leveraged ETFs

According to a report from *The Korea Herald*, the Korean brokerage industry has agreed to tighten investor protection rules for single-stock leveraged ETFs.

On Tuesday (July 14), the Korea Financial Investment Association convened an emergency meeting with CEOs of major brokerages to assess the market conditions of leveraged ETFs tracking Samsung Electronics and SK Hynix and discuss countermeasures. Participating institutions agreed in principle to raise the minimum margin requirement to curb excessive leverage use by retail investors. One plan under consideration involves raising the minimum margin threshold from 10 million won (Note from Odaily Planet Daily: approximately $6,714) to 50 million won (Note from Odaily Planet Daily: approximately $33,570).

The institutions also agreed to provide more targeted risk warnings based on investors' age and portfolio composition, and to enhance investor education to help them better understand the structure and risks of such products. Additionally, the industry agreed to distribute rebalancing and hedging trades more evenly across the trading session to reduce market impact from concentrated buying and selling near the close.

Bank of Korea: Likely to Hike 25bps on Thursday, Tightening Cycle Approaching

According to a report by BigGo Finance, sources within the financial sector suggest the market broadly anticipates the Bank of Korea to raise its benchmark rate by 25 basis points to 2.75% at its meeting on Thursday. This would be the first rate hike since January 2023, ending roughly three-and-a-half years of stability, and could well signal the start of a tightening cycle.

Bond market experts predict further rate hikes this year, with the benchmark rate reaching 3.00% by year-end and 3.25% in the first half of next year, meaning borrowers should prepare for rising interest rates lasting at least a year.

A central bank rate hike is itself a signal to control market liquidity. This implies:

• Rising margin loan rates, making the cost of borrowing for investment skyrocket.
• Soaring costs for holding leveraged positions, potentially forcing investors to sell some stocks to free up liquidity.
• Increased capital costs transmitting to leveraged trading, further shrinking new leveraged capital inflows.

During the previous Korean rate hiking cycle from August 2021 to January 2023, the KOSPI index first peaked near 3,000 points before falling to below 2,300 points, a decline of nearly 25%. Now, the KOSPI index's low point over the past year was around 3,080 points, but it has surged to a high of 9,385 points, a cumulative gain of over 204%. According to JPMorgan data, the KOSPI's year-to-date gain of 109% has outpaced major global indices (the S&P 500 is up just 11% over the same period).

However, as mentioned earlier, the major components of single-stock leveraged ETFs—Samsung Electronics and SK Hynix—together account for approximately 43% to 50% of the KOSPI's weight. This "mad bull run" was never a broad-based rally, but rather a malnourished and false prosperity.

On the other side, retail investors are also feeling the pressure from the central bank and leveraged assets.

Retail Investors Under Pressure: Foreign Investors Dump Over $110 Billion in Assets Year-to-Date, Korean Retail Bears the Brunt

According to Goldman Sachs, foreign investors have net sold a cumulative $110 billion in assets in the Korean financial market this year, more than five times the previous peak of $22 billion in 2021. In June alone, they sold $31 billion, a record high for a single month.

Meanwhile, Korean retail investors have been accelerating their buying: After purchasing 42.4 trillion won in June, they have net bought 13.2 trillion won in KOSPI stocks this month. As of July 14, the outstanding credit balance used by retail investors for KOSPI stock investments stood at 28 trillion won, below the all-time high of 29.8 trillion won recorded on June 24.

These retail investors, who rely heavily on margin trading and leveraged funds, are also exposed to risks related to capital restrictions.

Data released by the Financial Services Commission (FSC) and Financial Supervisory Service (FSS) shows that as of the end of June, stock loan balances in the online investment-related financial industry stood at 898.3 billion won, an increase of 374.5 billion won compared to the first half of the year. This represents a surge of 71.5% in just half a year from the 351.3 billion won recorded at the end of last year.

In response, the FSS will issue management targets to online investment finance companies, requiring that the monthly increase in new stock loans not exceed 30% of the increase in related loans from the previous month. This new management measure will take effect on August 16. Furthermore, to prevent risk accumulation from excessive concentration on stock loan business by these companies, regulators stipulate that the stock loan limit for a single borrower should generally not exceed 1 billion won. However, exemptions may be granted if a company can maintain its end-of-month stock loan balance from July onwards at or below the end-of-June balance level.

In summary, regulators are controlling the leverage level of retail investors at the source of funds to prevent further fueling the stock market bubble.

To conclude, Korean government agencies are implementing a four-pronged strategy—"closing the floodgates, limiting loans, raising thresholds, and cooling down sentiment"—to address risks associated with the domestic stock market's sharp swings, structural imbalances, and accelerating bubble.

Whether the rate hike will sound the first whistle for the stock market's downward trend this year remains to be seen based on the market's reaction tomorrow.