The Korea Composite Stock Price Index (KOSPI) surged 17.91% on July 31, marking its largest single-day gain in history, with SK Hynix hitting the daily limit of 30%. This rebound offered a brief respite for battered investors, but many retail traders who had borrowed heavily to speculate and lost their entire principal failed to survive what some called a "crazy Friday."

On July 29, a 29-year-old automotive software engineer named Park wrote on social media that his company's deputy manager, who was close to retirement, saw his entire life savings wiped out after his positions were forcibly liquidated. Just months earlier, the manager had earned 400 million Korean won (approximately 1.88 million yuan). That day, the KOSPI plunged 8.15%, triggering the ninth market-wide circuit breaker of the year. As of July 30, the index had fallen 38.63% from its June 22 high, erasing 2,877.78 trillion Korean won (about 13.53 trillion yuan) in market value, surpassing South Korea's entire annual GDP.

Leverage had fueled the KOSPI's "crazy bull market," but it also triggered the historic crash over the past month. Following the extreme volatility, South Korean retail investors are now protesting the government's decision to introduce leveraged products, while academics criticize it as a blind imitation of the U.S. system and an over-reliance on American industries. The global market is now asking: Is South Korea's deleveraging process over?

In May, to stimulate the stock market and attract capital inflows, South Korean regulators relaxed margin requirements and launched two-times leveraged ETFs targeting Samsung Electronics and SK Hynix. In a society where speculative trading and "creating wealth through debt" are widely accepted as a path to social mobility, these highly leveraged tools were quickly snapped up by retail investors. Trading volume in Samsung Electronics, SK Hynix, and their related leveraged ETFs once accounted for over 70% of total market turnover on the South Korean stock exchange. Among these, investors aged 20 to 30 made up 62% of the participants, becoming the dominant force in leveraged products.

By late June, as the KOSPI reached new highs, regulators attempted to cool the market, causing leveraged ETF prices to plummet. Brokerages issued a wave of margin calls, triggering forced liquidations and plunging the market into a spiral of "decline, margin call, and further decline." In mid-July, regulators slammed on the brakes, halting new product listings and banning related advertisements.

On July 29, about 30 memorial wreaths were placed outside the National Assembly building in Yeouido, Seoul, delivered by a retail investor group called the "Stock Market Normalization Association." The wreaths bore messages like "Is investor protection just talk?" and "Delist these products," demanding the cancellation of single-stock leveraged ETFs for Samsung Electronics and SK Hynix.

Chen Hanxue, a macro analyst at Sinolink Securities, explained that at a critical moment of extreme leverage expansion, the South Korean government's tightening measures—raising margin requirements, suspending new products, and raising interest rates—triggered a short-term surge in margin calls and forced liquidations. "While the intention was to prevent systemic risk, the liquidity tightening amplified the leverage stampede."

Data from the Korea Financial Investment Association shows that from May to July 29, cumulative forced liquidation amounts in the South Korean stock market reached 2.598 trillion Korean won (about 12.21 billion yuan), with July alone accounting for 766.953 billion Korean won. Meanwhile, margin account balances had fallen by 27.2 trillion Korean won (about 127.84 billion yuan) from their June 23 peak as of July 29.

From the KOSPI's peak of 9,114.55 points on June 22 to July 30, the index dropped 38.63%. Over 38 days, the market lost 2,877.78 trillion Korean won (about 13.53 trillion yuan) in value, a figure exceeding South Korea's 2025 projected GDP of about 12 trillion yuan. Morgan Stanley noted that the KOSPI's capitulation selling index had reached -2.36, extremely close to the low levels seen during non-crisis periods, while the forward price-to-earnings ratio had fallen below 6 times, even lower than the 6.3 times seen during the global financial crisis.

Historically, the KOSPI has experienced only 15 market-wide circuit breakers, but seven of them occurred in June and July of this year amid the deleveraging stampede. The crisis has devastated countless ordinary households. According to Korea Investment & Securities, as of July 27, 42% of the 872,000 investors in Samsung Electronics were in the red, while 57% of the 400,000 investors in SK Hynix were losing money.

A 45-year-old office worker named Kim invested 7 million Korean won in leveraged ETFs, then borrowed credit loans to add positions five times, increasing his investment to 34 million Korean won. His account ended up with a floating loss of over 50%. "I had no money to cover margins, and I couldn't bear to cut losses," he said. A 25-year-old college student, Choi, invested 8 million Korean won from his part-time job savings, even taking out microloans to leverage his position. Within two weeks, he lost all his savings and was left with debt. "The speed of losses from leverage is far faster than the speed of gains," he admitted. "This is a brutal punishment."

Domestic criticism in South Korea has focused on the government's "policy mistakes." Even before the introduction of single-stock leveraged ETFs, the market was already highly volatile. In March, shares of Samsung Electronics and SK Hynix experienced patterns where they rose 10% one day and fell 10% the next. Choi Bae-geun, a professor of economics at Konkuk University, wrote in a recent column that the government's launch of high-risk single-stock leveraged ETFs on May 27 was aimed at addressing the won's depreciation and attracting overseas retail capital. He argued that this was equivalent to "pouring oil on the fire" of the structural risk of over-reliance on the semiconductor industry, directly leading to the frequent crashes and forced liquidations in July.

Choi criticized the financial elite's decision-making, saying that regulators blindly copied advanced U.S. market systems, exposing a "colonial mindset" where South Korean financial elites are "more American than Americans." In the U.S. stock market, the "Magnificent Seven" tech giants account for only 33.4% of the S&P 500, while Samsung Electronics and SK Hynix alone represent over 53.3% of the KOSPI. The second mistake, he said, was betting the entire economy on semiconductors, which are heavily dependent on the U.S. AI industry. "South Korean semiconductors are a 'reflector' of the U.S. AI industry, not a 'light source,'" Choi noted. Once the market doubts the profitability of U.S. AI giants, uncertainty in semiconductor demand immediately triggers panic in the South Korean market. "Moreover, the semiconductor boom hasn't translated into job creation, with employment among young people in their 20s and core age groups (25-54) declining rapidly."

Chen Hanxue from Sinolink Securities also stated that the introduction of leveraged ETFs was, in hindsight, a serious policy error. The South Korean finance minister has publicly apologized in the National Assembly, admitting that the rollout of single-stock leveraged ETFs was "not well thought out." "The government overlooked the vulnerability of the South Korean market's high concentration. The daily rebalancing mechanism of leveraged ETFs creates passive selling pressure during declines, significantly amplifying market volatility, and has been widely criticized as a flawed regulatory approval."

However, Jang Geun-hyuk, a senior researcher at the Korea Capital Market Institute's macro-financial analysis division, said that while leveraged ETFs amplified the volatility of underlying stocks, and both the KOSPI and leveraged ETFs are heavily concentrated in Samsung Electronics and SK Hynix, the main driver of the crash was market concern about the sustainability of semiconductor industry earnings. Data shows that leveraged funds in the South Korean market have already contracted significantly. Margin balances fell to 32.995 trillion Korean won (about 155.1 billion yuan) as of July 29, down about 5.6 trillion Korean won (about 26.32 billion yuan) from the June 24 high of 38.6328 trillion Korean won. In July, the assets under management (AUM) of single-stock leveraged ETFs fell by about 60%.

Jang revealed that the AUM of these ETFs dropped from 15 trillion Korean won (about 70.5 billion yuan) in early July to 6 trillion Korean won (about 28.2 billion yuan) by July 29. Analysts at Societe Generale noted that the total AUM of leveraged ETFs tracking SK Hynix and Samsung Electronics had returned to levels seen at the end of May, roughly equivalent to the time of the first product launches. Chen Hanxue analyzed that South Korea's deleveraging process had entered the second half, but the pace varied significantly among different entities. Some leveraged ETFs and hedge funds were nearly complete, with Morgan Stanley estimating that ETF deleveraging was 75% to 100% complete, and hedge funds about 90%. However, retail credit margin balances had only fallen 15% from their peak, and the decline in ETF AUM was primarily due to price drops rather than share reductions.

Despite this, the speculative psychology of South Korean retail investors toward leveraged products has not fully faded. For example, the "KODEX SK Hynix Leverage ETF," the largest by AUM, saw net purchases by retail investors remaining positive in July, while foreign and institutional funds continued to sell. The global market's recent volatility has also raised questions about the spillover effects of South Korea's deleveraging. Chen Hanxue believes that the process has already infected other markets. "The KOSPI peaked on June 22, and the Philadelphia Semiconductor Index peaked just one day later." Jang Geun-hyuk said the market's direction will depend on concerns about over-investment in AI and the outlook for the memory semiconductor industry, which is traditionally cyclical. "Whether the shock from the South Korean market will further impact the global market hinges on whether fundamental expectations for the global semiconductor industry undergo a fundamental shift."

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