'KOSPI 0.6%' Scale Stock Stabilization Fund, Mixed Rescue Effects... Examining If It Saved the Korean Stock Market in the Past

Recognition of Situations Requiring Intervention: Investment Sentiment Recovers on 'Jeungan Fund Effect' Expectations
"All Past Cases Showed Stock Market Rebounds Due to Fundamental Solutions, Not Jeungan Fund"

[Asia Economy Reporter Lee Seon-ae] As financial market instability continues, financial authorities are expected to reactivate the Stock Market Stabilization Fund (증시안정기금, 증안펀드) as early as this month, drawing attention to whether it can serve as a "decline mitigation device."

According to the financial sector on the 21st, financial companies such as financial holding companies, insurance companies, and securities firms participating in the fund formation to operate the stabilization fund during market instability will hold board meetings individually to approve related matters.

If financial companies raise 10 trillion won, combined with 760 billion won prepared by stock market-related institutions such as the Korea Exchange and the Korea Securities Depository, a total of 10.76 trillion won could be injected. The 760 billion won prepared by these institutions has already completed preparation through board procedures last week. Accordingly, expectations are rising that the stabilization fund will be reactivated soon after 2 years and 7 months since March 2020.

There have been four instances of the stock market stabilization fund being formed domestically: in 1990, 2003, 2008, and 2020. At the end of March 2020, the five major financial holding companies, policy banks, financial sector, and securities-related institutions agreed to raise 10.76 trillion won, but the explosive liquidity supply led to a market rebound, and the funds were not actually deployed. However, opinions among market experts remain divided regarding its effectiveness.

Bottom Expectation 'Investor Sentiment Recovery' VS Small Scale 'No Liquidity Impact'

Those who believe that the formation and deployment of the stabilization fund will lead to a market rebound primarily rely on expectations of investor sentiment recovery. Additionally, there is analysis that the fund size could absorb the increased forced sales volume caused by foreign investors' additional withdrawals amid the significant rise in margin loan balances since the COVID-19 pandemic.

Researcher Kang Dae-seok of Yuanta Securities said, "The stabilization fund itself cannot raise the market, but the expectation of its effect, as it is recognized as necessary intervention, can lead to a market rebound," adding, "It is necessary to refer to past cases where the bottom was not far away."

Researcher Choi Yoo-jun of Shinhan Investment Corp. said, "It is expected to serve as a safety net to prevent financial system risk transmission during sharp declines, confirming the will to stabilize the financial market and digesting toxic sell orders."

However, voices doubting its effectiveness are also strong, judging that it cannot be a fundamental solution. Moreover, it is pointed out that reactivating the fund will not supply the "liquidity" that the domestic stock market currently lacks the most. The fund size is only about 0.6% of the KOSPI market capitalization (1,748.6182 trillion won as of the 20th), so its actual impact is expected to be limited.

Researcher Han Jae-hyuk of Hana Securities said, "Government intervention may cause a short-term rebound, but the trend will not be broken due to rising costs from interest rate hikes and liquidity contraction," emphasizing that it is not a fundamental solution. He added, "The current market correction due to global tightening and recession concerns is not a domestic-only risk," and "There is no liquidity to save the KOSPI."

Researcher Ha In-hwan of KB Securities also raised his voice, saying, "A close review of past stock market stabilization fund executions shows that the market trend was ultimately shaped not by the fund but by 'fundamental problem solutions.'" This means that meaningful rebounds in the market can only occur with changes in the global economic situation, which is the root cause of the domestic market downturn.

Fundamental Policies Needed More Than Stabilization Fund... Expectation for Volatility Mitigation Such as Panic Selling

Those who believe that actual market rebounds require solutions to domestic and global economic problems focus on past cases.

According to KB Securities, the 1990 market decline shows that the stabilization fund did not produce a rebound. Even after the fund was formed, the bear market continued for about two more years. The 2003 market decline was influenced globally by concerns over the Iraq War outbreak and domestically by worries related to the credit card crisis. The government deployed the stabilization fund in 2003, injecting 400 billion won, but the market declined for 30 trading days. Subsequently, on March 17, fundamental solutions such as the 'Comprehensive Credit Card Measures' and 'President Bush's Final Ultimatum to Iraq' (which reduced uncertainty and led to global market rises) were announced, and the market rebounded. KB Securities emphasizes that it is necessary to clarify that the rebound was ultimately caused not by the stabilization fund but by fundamental problem solutions.

The 2008 market bottom coincides exactly with the stabilization fund execution period. However, even then, many view that the direct cause of the first rebound was the U.S. Federal Reserve's announcement to purchase $600 billion in bonds and mortgage-backed securities (MBS) from Freddie Mac (a U.S. mortgage lender) shortly after the fund's execution. Researcher Ha pointed out, "The background of the second rebound (the start of the trend rebound) was the U.S. administration's 'mortgage measures,'" adding, "In 2008 as well, fundamental problem solutions, rather than the stabilization fund, caused the market rebound."

In 2020, experts view that before the 10 trillion won stabilization fund intervention, the Fed's monetary easing policies and fiscal policies injected massive liquidity into the market, leading to a 'V-shaped rebound.' There is no disagreement that this liquidity effectively drove the KOSPI above 3,300.

However, they judge that the fund can be expected to mitigate volatility caused by panic selling driven by excessive fear. A Hana Securities researcher said, "It will play a role in reducing volatility caused by panic selling immediately after intervention."

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