[Initial Reaction] Only Financial Supervision Exists, but No Policy Is Visible

Stock Market Plunge Triggers Forced Selling of Margin Loans, Creating 'Ant Hell'
Lowering Credit Loan Collateral Ratios Only Expands Margin Trading Scale

KOSPI Drops 10% This Month... Review of Stock Market Stabilization Fund Underway

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] 'A once-in-a-lifetime opportunity.' After the March 2020 COVID-19 crash, 'Joorini' (a portmanteau of 'stock' and 'child,' referring to novice investors) thought this way. They felt they had seized a life-changing chance as every stock they invested in rose, yielding decent returns. Even during last year's sideways market, they endured with the faint hope that their purchased stocks would rebound. In this year's sharp downturn, late regrets over failing to cut losses surfaced, but the expectation of 'another chance' slowly crept in. Last summer, when stock prices hit yearly lows and rebounded, Joorini who had invested all their spare funds went into margin buying (debt investing).

After the market close on the 26th, which was called 'Black Monday' due to the KOSPI index plunging over 3%, these Joorini received notices from securities firms about forced liquidation due to insufficient margin deposits. Then, right after the market opened on the 27th, a flood of forced liquidation orders poured out. According to the Korea Financial Investment Association, forced liquidations worth approximately 38.2 billion KRW occurred at that time, pushing the ratio of forced liquidations to outstanding margin loans to 20.1%. This more than doubled from 9.7% the previous day. It was the third-largest scale in history, following 23% on October 27, 2008, during the global financial crisis. The 28th, when the index fell to the 2100 level, was no different. The stock market was hit by multiple simultaneous adverse factors such as U.S. monetary tightening, global recessions including Europe, and the strong dollar phenomenon, turning it literally into an 'ant hell.'

The financial market plunged into chaos, but the financial authorities remained unseen. The KOSPI index, which was close to 3000 at the beginning of the year, was precariously near 2100 on the 30th. It had dropped more than 27% compared to the start of the year and was about 36% lower than the peak in July last year. The decline was even steeper than the 32.99% drop at the start of the COVID-19 crash. Considering the asset size and earnings of KOSPI-listed companies, the index had already fallen to levels comparable to the global financial crisis. The KOSPI price-to-book ratio (PBR) was 0.84, approaching 0.81 during the 2008 global financial crisis triggered by the U.S. Lehman Brothers collapse.

The financial authorities were not idle. In July, the Financial Services Commission announced exemptions from the obligation to maintain securities firms' margin loan collateral ratios and eased restrictions on the number of treasury shares that listed companies could repurchase. These were private-sector measures aimed at reducing forced liquidations by securities firms and increasing liquidity in the stock market by companies. The market rebounded afterward, but external factors such as falling international oil prices and expectations of a U.S. inflation peak played a larger role. Moreover, lowering the margin loan collateral ratio was criticized for increasing the scale of margin loans during the summer rebound.

This month, the index reversed downward again, recording a drop of over 10%. The renewed selling pressure from foreign investors since early this month dragged the index down. The KOSPI market capitalization shrank by 193 trillion KRW in just one month. Yet, the government only announced on the 28th that it would consider reactivating the stock market stabilization fund. At that time, Lee Bok-hyun, Governor of the Financial Supervisory Service, emphasized in his first broadcast appearance since taking office that "there is no rapid outflow of foreign capital." The Financial Supervisory Service oversees unfair trading in the capital market, while financial policies related to stock market stabilization are handled by the Financial Services Commission. Since the beginning of this month, the Financial Services Commission has focused only on measures to eradicate unfair trading in the capital market, such as anti-phone phishing measures, the so-called KakaoPay 'eat-and-run' prevention law (insider trading reporting system), and regulations on physical division. As the saying goes, 'you see as much as you know.' Meanwhile, a nationwide listening test related to the profanity controversy during President Yoon Seok-yeol's U.S. visit is underway.

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