Leveraged ETF fallout

Korea must restore policy credibility after financial populism fuels market turmoil

Markets have a habit of exposing political wishful thinking. They can absorb disappointing earnings and slower growth. They are far less forgiving when governments try to rewrite the rules by which prices are set.

South Korea's recent stock market turmoil offers a costly reminder.

The catalyst was single-stock leveraged exchange-traded funds tied to Samsung Electronics and SK hynix. They debuted in late May as enthusiasm surrounding artificial intelligence and semiconductor shares approached its peak.

Instead of merely amplifying investor interest, the products intensified every subsequent decline. Violent swings through June and July triggered automatic liquidations, repeated trading halts and heavy losses for retail investors.

Regulators later tightened investment requirements and suspended additional launches, sharply reducing trading activity. Those emergency steps calmed speculation, yet they arrived only after the damage had spread.

Many have portrayed the turmoil as another chapter in the global technology correction or the semiconductor cycle. Those forces clearly mattered. But they do not explain why Korea's benchmark index became one of the world's most turbulent major equity markets within weeks.

The answer lies partly in market structure. Samsung Electronics and SK hynix already dominate the benchmark index. Introducing derivatives that doubled daily price movements concentrated even greater pressure on an already narrow market.

Daily portfolio rebalancing and margin requirements then reinforced each decline. Falling prices prompted forced selling, which drove prices lower and generated fresh liquidations, creating a feedback loop that spread well beyond the semiconductor sector.

What began as a correction in a handful of stocks distorted price formation across the broader market. This turned an ordinary downturn into a painful breakdown in market stability.

The authorities' response inadvertently made the point. They accelerated plans to raise the minimum cash deposit from 10 million won ($7,050) to 30 million won, examined portfolio exposure limits and halted new listings of similar products.

Those measures were sensible. They also suggested that safeguards deserved closer scrutiny before the products ever reached investors.

Equally troubling is the speed with which such a consequential policy reached the market. Opposition parties have demanded investigations, while criticism has spread beyond partisan lines.

Even figures broadly aligned with the Lee Jae Myung administration have called for a closer examination of the approval process for the leveraged ETFs.

The issue extends beyond one financial product. Transparent decision-making is essential because trust in financial supervision depends as much on institutional independence as regulatory expertise.

When policy initiatives appear to originate in political offices while regulators adjust course afterward, the boundary between oversight and political direction inevitably becomes blurred.

Foreign media's portrayal of Korea as an unpredictable investment destination may overstate the case, and government officials are right to point to robust exports, healthy corporate earnings and solid macroeconomic indicators.

Yet sound fundamentals cannot fully offset doubts created when financial rules appear vulnerable to shifting political priorities rather than consistent regulatory judgment.

That distinction matters because the "Korea discount" has never reflected corporate performance alone. Investors evaluate the credibility of policymaking. Sudden regulatory shifts, emergency interventions and uncertainty over who ultimately directs financial oversight inevitably raise the premium global investors demand.

A transparent review of how single-stock leveraged ETFs won approval would therefore strengthen the market rather than weaken it. It should clarify whether internal objections received adequate consideration and whether institutional safeguards functioned as intended.

Speculative enthusiasm can lift share prices for a time, but lasting gains depend on institutional credibility. The government is moving to stabilize markets and rebuild confidence. Assuming belated measures can quickly restore trust would itself be another form of political wishful thinking.

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