The blood of Korean stocks “forced into the palace”, and the Korean policy toolbox was forced to “open the box”

The Zhitong Finance App learned that the South Korean authorities held an emergency meeting on Wednesday evening, highlighting that containing sharp fluctuations in the stock market and reversing the 33% decline since July has become a top priority. However, market observers believe that the measures introduced last night are only marginal adjustments, and discussions about what more measures the government can offer are heating up.

James Fletcher, Chief Investment Officer of Ethos Investment Management, said: “This poses a headwind for a government that actively encourages retail investors to enter the market. When the government guides household funds into the market and they suffer losses of this magnitude within 48 hours, the political pressure to act will suddenly increase.”

Here are a few regulatory and marketing tools that may be taken into account in market discussions:

Stock Market Stabilization Fund

The South Korean government has set aside about 10 trillion won (about 6.9 billion US dollars) to stabilize the stock market during times of market turbulence. At a time when retail investors are complaining about huge losses, this rarely used tool is once again in the eyes of analysts.

Previously, during the martial law crisis at the end of 2024 and during the COVID-19 pandemic, options for using the fund were mentioned, but the last time it was actually used dates back to 2008.

However, Francis Tan, Asia's chief strategist at Indosuez Wealth Management, pointed out that using the fund may raise moral risks. “Retail investors are calling for government intervention. This is a difficult situation,” he said. “Although the South Korean government can use stock market stabilization funds at any time to provide targeted liquidity and help restore confidence, this may distort market signals.”

The National Pension Service (NPS), one of the world's largest pension funds, usually works in concert with the government. However, Choi Hyunjae, head of Korean stock research at Yuanda Securities, believes that NPS is unlikely to actively participate in the current situation because “its domestic stock allocation ratio is already far higher than the strategic target level.”

Shorting is prohibited

Jung In Yun, CEO of Fibonacci Asset Management, said South Korea may reconsider imposing the shorting ban — a controversial measure that was lifted last year amid global investor protests.

“But I think this should be a last resort because it may damage foreign confidence without being able to resolve fundamental concerns,” he said. “The top priority is to prevent market adjustments from turning into a liquidity crisis.”

Restricted Leveraged ETF

Some investors and lawmakers are urging the delisting of leveraged ETF products linked to Samsung Electronics and SK Hynix launched in May. This type of product aims to amplify the rise and fall of underlying stocks.

An investor group even placed a wreath in front of the National Assembly to protest, and an opposition lawmaker also expressed support for the relevant demands.

Young Jae Lee, senior investment manager at Patek Asset Management in London, said that retail investors' buying of leveraged ETFs boosted market volatility and forced foreign investors to respond with large-scale sell-offs. For retail investors, this is tantamount to “a game of double loss.”

South Korea's top financial regulator has expressed “regret” over the launch of related products, but currently it seems unlikely that existing ETFs will be delisted. Instead, the authorities have temporarily suspended the listing of new products, set maximum positions for investors, and raised transaction costs.

Broker deposit requirements

Retail investors borrowed heavily to buy stocks — and forced liquidations triggered when prices fell — intensified market volatility. Francis Tan indicated that the government might consider increasing security deposit requirements and mentioned Singapore's practice of strengthening investor education.

While any stricter rules can curb the growth of financing balances, it is also important to mitigate the mechanical selling pressure of accounts when they face forced liquidation. Choi HyunJae said that one way to deal is for brokerage firms to relax collateral requirements or give a short grace period before forced liquidation. But he also added that any such relief measures would put brokerage firms at greater risk and could cut their margin related income.

Stock repurchase rules

The government may also adjust share repurchase rules to encourage companies to repurchase, particularly those that have announced repurchase plans and believe their share prices are undervalued.

Currently, the scale of repurchases by enterprises at any point in time is subject to an upper limit, and must be distributed according to a pre-disclosed schedule.