Despite Interest Rate Hikes, Increasing 'Bittu' Debt... Could It Become a Stock Market Time Bomb?

If the Interest Rate Hike Trend Continues
Concerns Over Forced Sales Due to Interest Burden
KOSPI Index Steadily Declines
Credit Trading Loan Balance at 19 Trillion Won Level

[Asia Economy Reporter Kwon Jaehee] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), showed a hawkish stance at the Jackson Hole meeting held on the 26th (local time), turning the red light on our stock market as well. The possibility of a third consecutive giant step (75bp hike) at next month's Federal Open Market Committee (FOMC) has increased. Recently, our stock market has seen a brief rebound, leading to an increase in 'debt investment' investors, but if the rate hike trend continues, they will face not only interest burdens but also forced liquidation (margin call).

According to the Korea Financial Investment Association on the 29th, as of August 25, the outstanding balance of margin loans was recorded at 19.305 trillion KRW. Margin loans are funds lent by securities firms to investors using held stocks or cash as collateral, representing the scale of 'debt investment.' When the KOSPI was at 2993.29 (closing price on December 29) last year, the margin loan balance was about 23.0886 trillion KRW. However, as the index steadily declined this year, the margin loan balance also showed a downward trend. In particular, in June, it dropped to 2332.64 (June 30) for the first time in 23 months since August 2020, and due to forced liquidation caused by the stock price decline, the margin loan balance fell to the 17 trillion KRW level. But in less than two months, it increased by more than 1.55 trillion KRW.

Although the number of people borrowing to invest with expectations of a rising market has increased, they now have to worry about rising interest. The U.S. has already implemented two giant steps, and a 0.75% base rate hike at the September FOMC is becoming a foregone conclusion. Additionally, Lee Chang-yong, Governor of the Bank of Korea, stated, "It is difficult to end rate hikes before the U.S.," and "At the current inflation level (4-5%), the rate hike trend will continue."

As the base rate hikes continue, securities firms are also raising interest rates. Mirae Asset Securities announced that from the 29th, the interest rate on margin loans over 91 days will be raised by 0.4 percentage points from the existing annual 8.9% to 9.3%. This is the second increase in just four months since the last hike on April 18. KB Securities also announced that for periods over 91 days, where the highest rate applies, the rate will increase from 9.0% to 9.5%, effective next month. In addition, Samsung Securities (up to 9.8%), DB Financial Investment (9.7%), Kiwoom Securities (9.5%), SK Securities (9.5%), Shinhan Financial Investment (9.5%), Meritz Securities (9.2%), NH Investment & Securities (8.7%), and Kakao Pay Securities (8.5%) have all raised their interest rates consecutively. Among these, a 10% level interest rate has appeared; Yuanta Securities charges 10.3% interest on margin loans for periods of 151 to 180 days.

Most margin loans are demanded within 100 days, so if the stock market rises during this period, there is no problem. However, if the collateral ratio of margin loans is not maintained due to a stock price decline, forced liquidation occurs, where investors' held stocks are sold. If large-scale forced liquidation occurs, a large volume of sell orders floods the market, causing the stock market to fall even further. Currently, the forced liquidation grace period is scheduled until September 30.

A securities industry official said, "The increase in margin loan balances seems to be due to increased short-term trading demand as our stock market showed a short-term rebound in the past month," adding, "However, market volatility is so high that even a small shock can lead to panic selling."

This content was produced with the assistance of AI translation services.