KOSPI drops 5.7% as South Korea warns on chip stock concentration

South Korea's benchmark stock index came within striking distance of a technical bear market, triggering an emergency government response.

South Korea's KOSPI dropped 5.7% on July 8, nearing a bear market after Finance Minister Koo Yun-cheol convened an emergency meeting on chip stock concentration.

"The rise in semiconductor sector concentration has become a driver of market volatility, with fluctuations in chip stocks pushing moves across the broader index," the finance ministry said in a statement after the meeting, which included Bank of Korea Governor Rhee Chang-yong and financial regulators.

The KOSPI recovered some ground by the close but remained down about 15.6% from its June 22 record high. Samsung Electronics fell as much as 6.9% and SK Hynix dropped 5% before paring losses, even after Samsung posted a 19-fold increase in quarterly profit earlier this week. The selloff triggered a circuit breaker for the sixth time this year and the 12th in the index's history. Foreign and institutional investors led the selling, with profit-taking and portfolio rebalancing cited as key drivers alongside shifting expectations for the global AI sector.

The emergency response shows that authorities view the current volatility as a systemic risk rather than a normal market correction. Potential regulatory tightening on leveraged products threatens to further suppress trading volumes in a market already dominated by retail investors, who accounted for nearly 92% of flows into single-stock leveraged ETFs.

Leveraged ETFs Draw Regulatory Scrutiny

At the center of regulatory concern are 16 single-stock leveraged and inverse exchange-traded funds tracking Samsung Electronics and SK Hynix, launched on May 27. Retail investors held nearly 92% of the 14 trillion won ($10.7 billion) invested in these products as of June 22. Credit-loan balances at brokerages swelled to 37.3 trillion won in June from 32.9 trillion won at the end of March, while forced liquidations from margin calls more than doubled to 52.7 billion won from 26.2 billion won over the same period.

The Financial Supervisory Service, led by Governor Lee Chan-jin, said it would monitor the impact of single-stock leveraged ETFs and review asset managers' marketing practices if necessary. The Bank of Korea separately warned that these products could push one-sided trading and increase stock concentration. Lee had previously described the situation as "the tail wagging the dog," arguing that the products generated minimal profit for investors while creating disproportionate market risk.

From Global Leader to Volatility Test

The KOSPI was one of the world's best-performing major indexes this year, surging as much as 116% from January to its June 22 peak, driven by a global spending wave on AI data centers. The index remains up about 73% year-to-date, still ranking among the top global benchmarks. But that rally depended heavily on just two stocks — Samsung Electronics and SK Hynix — making the market unusually vulnerable to shifts in AI sentiment.

Fidelity International portfolio manager Ian Samson said the volatility stems from uncertainty about whether the roughly $1 trillion in capital spending by a handful of large technology companies can be sustained. If that chip expenditure proves unsustainable, downside risks will emerge, he said.

The KOSPI's decline tracked weakness in global semiconductor stocks, with the Philadelphia Semiconductor Index coming under pressure as investors reassess the durability of AI-driven demand. The won weakened against the dollar, adding to pressure on foreign investors who had piled into Korean equities earlier this year. The next major test for the market will come when SK Hynix begins trading its American depositary receipts on the Nasdaq on July 10, a $28 billion listing that will test global investor appetite for Korean chip stocks.

This article is for informational purposes only and does not constitute investment advice.