The South Korean stock market is facing its most severe test this year, with the benchmark KOSPI index's decline from its historical peak once touching 20%, nearing the technical bear market threshold. Regulators simultaneously convened an emergency meeting, warning that excessive concentration in the semiconductor sector has become a core risk amplifying market volatility.

According to media reports, South Korea's Finance Minister Joo Hyung-hwan convened a meeting on Wednesday with the central bank governor and heads of various financial regulatory agencies. A post-meeting statement indicated that profit-taking by foreign and institutional investors, portfolio rebalancing, and shifting global expectations for the AI sector have collectively heightened market volatility.

The statement directly addressed the issue of concentration in the semiconductor sector, stating that "increased concentration in the semiconductor sector has become a driver of market volatility, and the impact of chip sector fluctuations on the overall stock market is intensifying."

The KOSPI index plunged as much as 5.7% during Wednesday's session, hitting its lowest level since May 20th, before partially recovering losses driven by a rebound in chip stocks. It remains down approximately 15.6% from the historical high set on June 22nd.

SK Hynix Inc (KRX: 000660) saw an intraday decline of up to 5%, while Samsung Electronics Co Ltd (KRX: 005930) fell as much as 6.9% at one point.

Notably, Samsung Electronics had earlier this week reported a quarterly profit surge of 19 times year-over-year, yet its stock price remained under pressure. This indicates that market doubts about the sustainability of AI investments have outweighed positive fundamental news.

A Sharp Reversal from Top Performer to Bear Market Brink

The South Korean stock market was the world's best-performing market earlier this year. The KOSPI index had gained approximately 116% from the start of the year to its June 22nd peak. Its year-to-date gain remains around 73%, still placing it among the top performers among major global benchmark indices.

However, this rally was highly dependent on two chip giants, Samsung Electronics and SK Hynix, making the market particularly vulnerable when AI sentiment reversed. Over the past few weeks, the KOSPI has experienced sharp fluctuations as investors interpreted every piece of AI industry news, with the market attempting to assess whether this rally could be sustained.

Ian Samson, a portfolio manager at Fidelity International, commented, "A significant amount of volatility stems from fundamental uncertainty. We do see strong demand for various semiconductors driven by AI, but this largely depends on the approximately $1 trillion in capital expenditures from a few large technology companies." He added that if this scale of chip spending proves unsustainable, downside risks will materialize.

Leveraged ETFs Amplify Volatility

Regulatory concerns are not only directed at the semiconductor sector itself but also focus on the rapidly expanding single-stock leveraged ETF products.

The Financial Supervisory Service of South Korea stated on Tuesday that it would monitor the impact of chip-stock-linked single-stock leveraged ETFs on the market and, if necessary, review the marketing practices of asset management companies. The Bank of Korea warned on Sunday that single-stock leveraged ETFs could amplify one-sided trading, increase concentration in specific stocks, and exacerbate market volatility, stating it would coordinate with relevant agencies to address associated risks.

According to a Bloomberg report, leveraged ETFs amplify volatility in both upward and downward market movements and have been a significant contributor to the KOSPI's sharp swings during this period.

Circuit Breakers Frequently Triggered, Regulatory Pressure Escalates

The intensity of market volatility has left its mark at the systemic level. Earlier this week, the KOSPI triggered its circuit breaker mechanism again, marking the sixth such event this year and the twelfth in the history of the South Korean stock market. The trigger was the sharp volatility in heavyweight chip stocks like Samsung Electronics and SK Hynix.

In response to escalating market risks, South Korean regulators are gradually intensifying their response. From the central bank's risk coordination statement to the Financial Supervisory Service's commitment to monitor ETFs, and the cross-departmental joint meeting chaired personally by the Finance Minister, a series of intensive statements indicate that authorities are treating this round of volatility as a financial stability issue requiring a systemic response, rather than merely a normal market adjustment.