Golden Age or Crisis Era? Korea’s Central Bank Poised to Hike Rates as Brokerage Firms Aim to Raise Margin Requirements by 5x

Original｜Odaily Planet Daily (@OdailyChina)

Author｜Wenser (@wenser 2010 )

Who would have thought that a Bank of Korea rate hike might arrive before the KOSPI index hits a new high?

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 meeting tomorrow; if this is confirmed, it would be the first rate hike since January 2023, marking a hiatus of about three and a half years. Some bond market experts even predict further rate increases within the year, with the benchmark rate reaching 3.00% by year-end and rising to 3.25% in the first half of next year.

Consequently, despite the KOSPI index's sharp rebound today, market panic has been somewhat triggered. Additionally, due to the剧烈 volatility of ETFs tracking SK Hynix and Samsung Electronics, Korean brokerages plan to raise the minimum margin requirement for single-stock leveraged ETFs by five times.

A month ago today, the surge in the stock market had Korean girls declaring, "The golden age of humanity has arrived." Now, a month later, will the Korean market enter an era of crisis due to liquidity tightening and higher market entry barriers?

South Korea's Stock Market Draws All-Round Attention: From the President to Brokerages, from the Central Bank to Financial Regulators

The consecutive sharp rises and falls in the stock market have driven the Korean people—often called a "nation born with leverage"—into complete frenzy. On July 13th, an incident even occurred in Busan where an "investment KOL was stabbed by an emotionally charged fan who had lost money."

Such extreme speculative fever has sparked widespread attention and heated discussion across South Korean society, from President Lee Jae-myung to Financial Investment Association Chairman Hwang Seong-yeop and the CEOs of Korea's top 10 asset management companies; from the Bank of Korea to the central financial regulatory authorities, everyone is focused on "stocks," "securities," and "financial markets."

South Korean President Lee Jae-myung: Market Needs Time to Stabilize After Sharp Rises

Today, during a policy meeting with senior government officials in Seoul, South Korean President Lee Jae-myung stated: "The domestic stock market is currently quite unstable. Because the market has experienced an unprecedented sharp rise 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 and the Korea Exchange to quickly address related issues and formulate follow-up measures.

Market participants expect regulators to intervene to mitigate the impact of such high-risk products on market stability, which may include raising the minimum margin requirements for leveraged ETF investments. The main opposition party, the People Power Party, accused the Lee administration on Tuesday of encouraging excessive risk-taking by setting ambitious stock market goals on one hand while neglecting the accumulating leverage risks on the other.

Previously, influenced by the global AI industry chain and semiconductor boom, the South Korean government had proposed an "800 trillion won chip factory investment plan" and aims to invest at least 30 trillion won in the chip sector over the next 15 years. Just half a month later, circuit breakers were triggered consecutively for KOSPI-listed stocks like SK Hynix and Samsung, significantly dimming the "semiconductor glory" that the government and the nation were once so proud of.

Nevertheless, following market principles, sharp rises are inevitably followed by sharp falls. It is also appropriate for the Korean government to promote industrial development and long-term construction. However, during this process, who bears the cost and who reaps the rewards depends on performance.

South Korean Brokerages: Plan to Raise Minimum Margin for Single-Stock Leveraged ETFs to

According to reports from The Korea Herald, South Korean brokerages have agreed to tighten investor protection rules for single-stock leveraged ETFs.

On Tuesday (July 14th), the Korea Financial Investment Association convened an emergency meeting with CEOs of major brokerages to assess the leveraged ETF market tracking Samsung Electronics and SK Hynix and discuss countermeasures. Participating institutions agreed in principle to raise the minimum margin requirement to curb excessive leverage usage by retail investors. One plan under discussion is to increase 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 strengthen investor education to help them better understand the structure and risks of such products. Additionally, the industry agreed to more evenly distribute rebalancing and hedging transactions throughout the trading session to reduce the market impact of concentrated buying and selling near the close.

Bank of Korea: Possible 25bps Rate Hike on Thursday, Tightening Cycle Approaches

According to a report by BigGo Finance, sources in the financial world revealed that the market widely expects the Bank of Korea to raise its key interest rate by 25 basis points at its meeting on Thursday, from 2.50% to 2.75%. This would be the first rate hike since January 2023, ending a hiatus of about three and a half years, and could signal the start of a tightening cycle.

Bond market experts predict further rate increases within the year, with the benchmark rate reaching 3.00% by year-end and rising to 3.25% in the first half of next year. This means borrowers must prepare for a period of rising rates lasting at least a year.

A central bank rate hike is inherently a signal to control onshore liquidity. This implies that:

• Margin loan rates will rise, directly increasing the cost of borrowing for investments;
• The carrying cost of existing leveraged positions will surge, potentially forcing investors to sell some shares to free up liquidity;
• Higher capital costs will further transmit to the leveraged trading side, causing new leveraged capital to shrink further;

During the previous Bank of Korea rate hike cycle from August 2021 to January 2023, the KOSPI index initially surged to near 3,000 points before falling to below 2,300 points, a decline of nearly 25%. Now, within the past year, the KOSPI index's low was around 3,080 points, but its high has surged to 9,385 points, a cumulative increase of over 204%. Data from JPMorgan shows that the KOSPI index has outperformed global benchmarks year-to-date with a 109% gain (compared to the S&P 500's 11% gain over the same period).

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

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

Retail Investors Under Pressure: Foreign Investors Sold Over $110 Billion in Assets This Year, Korean Retail Hold the Line

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

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

These retail investors, heavily reliant on margin trading and leveraged funds, are also facing risks related to capital constraints.

Data released by the Financial Services Commission and the Financial Supervisory Service shows that outstanding stock loans in the online investment-related financial sector totaled 898.3 billion won as of the end of June, an increase of 374.5 billion won from the first half. Compared to the end of last year's 351.3 billion won, it surged by 71.5% in six months.

In response, the Financial Supervisory Service will issue management targets to online investment finance companies, requiring that the monthly increase in new stock loans not exceed 30% of the previous month's increase in related loans. This new management measure will take effect immediately on August 16th. Furthermore, to prevent risk concentration from online investment finance companies overly focusing on stock loan business, regulators have stipulated that the stock loan limit for a single borrower should, in principle, not exceed 1 billion won. However, exemptions may be granted if a company can maintain its month-end stock loan balance from July onwards within its end-June balance level.

In summary, regulators are controlling retail investors' leverage levels at the capital source to prevent further fueling the stock market bubble.

In conclusion, the South Korean government and institutions are employing a four-pronged strategy—"closing the gate, restricting loans, raising barriers, and cooling enthusiasm"—to address the risks associated with the domestic stock market's sharp volatility, structural imbalances, and accelerating bubble.

Whether this rate hike will sound the first whistle for the stock market's downward trend within the year remains to be seen, as we wait for the market's reaction tomorrow.