South Korean stock market plunges! One out of every 30 Korean adults faces margin calls, with forced liquidation rates soaring from 2.1% to 10%.

```

Over the past week, the decline in the South Korean stock market has evolved from a market-level price revaluation into a widespread leverage liquidation event affecting society at large.

According to data from the Korea Financial Supervisory Service, as of July 13, more than 1.2 million leveraged retail investor accounts had hit the margin call threshold across the entire South Korean market. Relative to the country's population, this means that 1 in every 30 adults (about 3.4%) faces the risk of forced liquidation.

Since July, the cumulative scale of forced liquidation has reached 344.2 billion KRW, with 142.2 billion KRW forcibly liquidated in a single day on July 9—nearly five times the previous day's 28.8 billion KRW. Retail margin deposit balances have evaporated by nearly 30 trillion KRW compared to the end of June, falling to 107.1 trillion KRW—the lowest level since June 2020.

On July 16, the Korea Composite Stock Price Index (KOSPI) closed down 463.81 points, a drop of 6.37%, at 6820.60 points. SK Hynix fell 11.62%, Samsung Electronics dropped 8.23%. On July 13, South Korea’s stock market suffered a "massacre", with the KOSPI plunging nearly 9% and breaking below 7,000 points.

John Woods, Chief Investment Officer for Asia at Lombard Odier, told Bloomberg TV: "For a long time, I’ve been deeply concerned about the speculative frenzy among South Korean retail investors. Generally speaking, these things rarely end well."

Even more concerning, the channels for retail credit funds to enter the market in Korea have essentially closed. In the first half of the year, over 85% of household loan quotas from the five major commercial banks were consumed. Without the last source of credit, the market can only continue to look for lower support.

The chairman of Korea’s Financial Services Commission has stated that regulatory measures for leveraged ETFs will be announced soon. On July 16, senior officials from four major economic departments will coordinate to study solutions to the impact of single-stock leveraged ETFs on the stock market.

1.2 Million Accounts Hit Margin Calls, Over 300,000 Forced Liquidations

As of July 13, more than 1.2 million leveraged accounts across the market had hit margin call thresholds, of which around 320,000 to 360,000 accounts were fully forcibly liquidated by brokerages. Broadly, total leveraged losses are estimated at about 2.15 trillion KRW (roughly $1.44 billion USD).

The intensity of deleveraging is accelerating rapidly. For the week of July 10, the forced liquidation rate for stocks bought on short-term loans surged above 10%, whereas the average for the past six months was only about 2.1%.

Margin balances, financing balances, and investor deposits are falling simultaneously, forming a “stock price drop → insufficient margin → forced liquidation → further stock price drop” self-reinforcing cycle in the market.

Underestimated Risk: Financing Balances Highly Concentrated in Two Stocks

On the surface, the ratio of South Korea’s financing balance to total market capitalization is about 0.5%, which does not appear remarkable—but this creates a false sense of security. Nearly all leveraged funds are concentrated in Samsung Electronics and SK Hynix: as of mid-June, these two stocks had a combined financing balance of about 9.1 trillion KRW, accounting for more than a third of total KOSPI financing balances.

When these two stocks, which together make up more than 50% of the KOSPI index weight, drop simultaneously—on July 13, SK Hynix plunged 15.37% for its largest single-day drop ever, and Samsung Electronics fell 10.7%—the selling pressure magnified by leverage far exceeded what the market’s liquidity could absorb.

Foreign and domestic institutions net sold $1.13 billion and $1.5 billion respectively on that day, while retail investors net bought 4.5 trillion KRW, but still could not withstand the downward pressure.

The risk concentration in leveraged ETFs is equally alarming. Using the combined market capitalization of the two companies as the denominator and leveraged ETF risk exposure as the numerator, the ratio in the Korean market reaches 1.88%, significantly higher than the NASDAQ 100 leveraged ETF’s 1.1%. Given Korea’s market liquidity is much lower than that of the US, the impact of leveraged funds on underlying stocks is even more pronounced.

Valuation Is No Longer the Safety Margin—Liquidity Determines the Market Bottom

After this plunge, KOSPI’s dynamic price-earnings ratio has dropped to about 6 times, approaching lows seen during the global financial crisis in 2008.

But this does not constitute a buying signal: in highly leveraged markets, the bottom is often determined by liquidity conditions rather than valuation—so long as forced liquidation pressures persist, the selling will not stop simply because prices are "cheap."

Deleveraging of financing usually goes through three stages: margin call triggers, concentrated forced liquidation, and stabilization of financing balances. Korea’s market is currently likely in the latter part of the second stage.

Whether regulators can introduce measures to raise the entry threshold for leveraged products and strengthen suitability screening for investors will determine whether deleveraging becomes an orderly clearance or continues as disorderly deterioration.

Risk Disclosure and DisclaimerThe market involves risk, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the unique investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions herein fit their particular circumstances. Investment decisions based on this are at your own responsibility. ```