By Cynthia Kim
SEOUL, July 30 (Reuters) – South Korea’s efforts to rein in the leveraged products wreaking havoc in its financial markets may not go far enough to quell skyrocketing volatility, analysts say, as pain and public anger mount over a $2 trillion-and-counting stocks wipeout.
As the hottest trade in the world has hit reverse, with the country’s stock market down about 40% in a month, it is local investors — young people, pensioners and mums and dads — who borrowed money and piled in late who are hurting the most of all.
That has turned up the heat on a government that cheered on the rising market and has been under pressure as it has fallen, with some investors placing condolence flowers outside the country’s parliament building.
Amid the selloff on Wednesday, the Bank of Korea governor and the heads of financial regulators met in the evening to discuss ways to stem the pain.
After the meeting, regulators said they would put caps on individual investment into single-stock leveraged funds and raise the trading costs for those ETFs, which have had an outsized role in the rally and the reckoning, turning the market’s biggest stocks into rollercoaster rides.
But market participants say the rules do not target the scale of the ETFs’ leverage, as regulators in Hong Kong did on July 23, and that it will be tricky to dampen their influence so long as there are buyers who want to get rich quick.
“The measures will help ease volatility in the Korean stock market, but introducing a liquidity put, such as a market stabilisation fund, would have a greater effect,” said Kim Jin-wook, an economist at Citi Korea.
Another analyst, the head of research at a brokerage in Seoul, speaking anonymously due to the sensitivity around the topic in South Korea, said the latest regulatory measures were unlikely to work as the cap was hastily announced without putting proper thought into it.
The analyst said Hong Kong’s rules reduced forced selling during market stress, helping to lower volatility.
However, the ETF investment cap in South Korea will not help existing investors who will not be required to sell their holdings, and price swings are likely to stay as the Korean rules will not affect similar leveraged products listed in New York and Hong Kong, he said.
‘SLAUGHTERING RETAIL INVESTORS’
As markets cratered this week, the sidewalk outside the National Assembly building in Seoul was covered with about 40 wreaths of condolence flowers laid in protest against the government’s handling of the single-stock leveraged funds.
One ribbon on a white wreath read “Slaughtering retail investors”. “Wait ’til pay back time, I will repay next time I vote,” read another.
Inside the Assembly, on Wednesday, South Korea’s Finance Minister Koo Yun-cheol came under pressure from opposition lawmakers and said he was sorry for introducing the leveraged products without careful consideration.
The stock market on Thursday seemed to stabilise after two straight sessions of heavy losses, though it is a long way from arresting a downtrend that has erased $2 trillion in value from the KOSPI since June’s record high.
The market is headed for its largest ever monthly fall — and that is despite enormous earnings at top chipmakers Samsung Electronics and SK Hynix, which between them this week reported 150 trillion won ($100 billion) in quarterly profit.
($1 = 1,441.9000 won)
(Additional reporting by Dahyun Lee; Writing by Tom Westbrook; Editing by Christian Schmollinger)
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