South Korea's Kospi index fell 16% amid fears over AI infrastructure profitability and rising competition in memory production, prompting trading halts.
In a dramatic turn of events, South Korea's Kospi stock index experienced a staggering 16% drop on July 28 and 29, triggering trading halts due to a market circuit breaker. Investor apprehensions regarding the profitability of AI infrastructure investments, coupled with intense competition in the memory production sector, have been identified as key contributors to this market turmoil.
Market Factors Leading to Decline
The sell-off was accelerated by the recent debut of Chinese semiconductor company CXMT on July 27, which saw its shares skyrocket by 466% on its first trading day, achieving a market capitalization exceeding $488 billion. This IPO not only set a record for the Chinese semiconductor industry by raising $8.6 billion but also coincided with a 4.7% decline in the MSCI technology index for the Asia-Pacific region, excluding Japan. As a result, shares of major companies such as Micron and SanDisk fell by 5% and 12%, respectively, while SK Hynix saw an 8.5% drop in Seoul trading.
Further pressure came on July 28 when SK Hynix reported a record operating profit of 60.54 trillion won ($41.25 billion), marking a 557% year-on-year increase. However, this figure fell short of the market expectation of 64 trillion won, leading to a 15% decline in its stock price, which continued to slide the following day.
Concentration and Leverage Heighten Market Volatility
SK Hynix and Samsung Electronics now represent about half of the Kospi's market capitalization, a significant increase from approximately a quarter at the end of the previous year. This concentration in the market has made it particularly sensitive to price fluctuations. Following the introduction of domestic leveraged funds on May 27, assets in these products have surged to $50 billion, with South Korean retail investors contributing 14 trillion won (about $9.4 billion) compared to 2 trillion won from foreign investors. The mechanism of these funds, which involves buying or selling stocks to maintain a specific ratio, exacerbates price declines during downturns.
The Kospi volatility index has remained elevated, recording a historical high of 97.99 on June 19. The KODEX double-leveraged fund for SK Hynix has plummeted by about 70% from its June peak, while a Hong Kong-based fund for the same stock has dropped by 83% within a month.
Rising Insurance Costs for AI Companies
The sell-off has also negatively impacted the demand for memory chips, particularly from major American companies like Amazon, Meta, and Microsoft. The cost of credit default swaps for these firms has surged, indicating heightened concerns over their debt. For instance, Oracle's default insurance costs have risen significantly, now reflecting worries about AI-related debt, with much of its revenue tied to OpenAI, which has yet to generate cash flow.
Since September, the total debt of these firms has more than doubled, surpassing $360 billion, while their combined capital expenditures for 2026 are projected to reach $725-730 billion. Alphabet reported a negative cash flow of $5.9 billion in Q2, marking a first in its history despite a robust increase in its cloud division.
Government Response to Market Crisis
In response to the market collapse, South Korean authorities convened an emergency meeting on July 29, leading to the announcement of new regulations. The Ministry of Finance revealed plans to cap leveraged fund investments at 20% of a retail investor's portfolio and increase trading costs. Additionally, the minimum deposit for accessing these products will be raised significantly.
Finance Minister Koo Yun-chul and Financial Services Commission Chairman Lee Ok-won publicly apologized for the inadequate preparation surrounding the launch of these funds, acknowledging the need for better regulation and oversight.
Minimal Impact on Cryptocurrency Market
Despite the chaos in the South Korean stock market, cryptocurrencies like Bitcoin remained relatively stable, with only a slight 0.4% drop, trading around $64,500. However, the sell-off did have repercussions for perpetual contracts tied to stocks on cryptocurrency exchanges, particularly SK Hynix, which saw a significant decline due to a low-liquidity trade on a Korean pre-market platform.
