[Weekly Kyunghyang] Office worker Park Sung-jun (48) secured 45 million won in spare funds from his company through an employee loan before Chuseok. Having held SK hynix shares since last summer, on the morning of November 6, when the KOSPI index at one point plunged nearly 6%, Park added about 20 million won to SK hynix. That day, SK hynix shares fell nearly 10% intraday before recovering most of the previous day level by the close. He said, “I wish my initial investment had been larger, but it rose too abruptly,” adding, “I think it has further to go, so I plan to increase my holdings whenever the price pulls back.” He added, “My return on (SK hynix) is well over 100%, so even if there is a correction, it is not a big burden,” and “Among other holders as well, there is now more of a perception that a drop in share price is actually a bargain-buying opportunity.”

As the KOSPI broke through the 4,000 mark for the first time in history, retail investors’ ‘debt-fueled investing’ (borrowing to invest) also surpassed all-time highs. Confidence gained from the experience of rapid price increases, combined with FOMO (Fear of Missing Out)the anxiety of being left behindhas ignited a speculative impulse to maximize returns even if it means borrowing. Although forecasts calling for a continued uptrend on the back of expectations for a semiconductor supercycle still dominate, there is growing concern that a replay of the 2021 ‘debt-fueled investing’ episodewhen the market plunged after breaking ‘KOSPI 3,300·KOSDAQ 1,000’ and tormented retail investors for a long timecould be in the making.

A, a Korean retail investor who has been investing in U.S. stocks since 2023, also took out an unsecured bank loan last summer to increase his investment capital. A had been running a relatively conservative portfolio of U.S. dividend ETFs and S&P index-tracking ETFs, but as AI market leaders surged this year and he felt left out, he borrowed and moved into direct investments in semiconductor stocks in both the U.S. and Korean markets.

A said, “I have been making regular contributions to dividend ETFs with a long-term mindset, but because there were no AI-related stocks in the ETF portfolio, I felt like I alone was taking a huge hit,” and added, “Switching out made the dividend stocks feel too precious to sell, and simply waiting left too much regret, so I had no choice but to borrow to invest.” He said, “Right now, my direct investments are yielding similar returns in both the Korean market (domestic market) and the U.S. market, and considering taxes, the domestic market is a bit better.” He added, “There are people around me doing unsettled trades on margin, and I am seeing people who took out loans to use 2x leverage, so it feels like things are gradually overheating.”

According to the Korea Financial Investment Association, as of November 7, outstanding margin financing in the domestic stock market stood at 26.2165 trillion won, up by more than 10 trillion won from the start of the year (15.6823 trillion won). This exceeds the previous peak of 25.6560 trillion won in September 2021 by more than 500 billion won.

Outstanding margin financing is the amount investors borrow from brokerages to buy stocks; the stronger the willingness to jump into the market even by taking on debt, the larger it becomes. While it reflects the market’s and investors’ conviction in an upward trend, it is equally risky because during sharp declines it can turn investors into debtors. In particular, if borrowers fail to repay at maturity, brokerages carry out forced liquidations, selling the held shares, often at prices below the previous close, which can become a trigger for further declines.

Unsecured loans at commercial banks also surged by nearly 1.2 trillion won in the space of a week in November. As of November 7, outstanding household unsecured loans at the five major banks totaled 105.9137 trillion won, up 1.1807 trillion won from the end of October (104.7330 trillion won). In just one week, the increase in bank unsecured loans exceeded even the entire rise for October (925.1 billion won). This is not unrelated to the recent roller-coaster market of repeated intraday spikes and plunges: when prices tumble, individuals who see it as a bargain opportunity have used relatively accessible unsecured loans to leverage up and jump into the market even more aggressively.

The issue is that even when optimism has dominated the market, there have always been corrections of various sizes and roller-coaster conditions. Moreover, as with the growing arguments about an AI industry bubble, it is impossible to predict the emergence of sharp, non-cyclical sell-offs that have recurred over time.

The last time outstanding margin financing set a record high2021was a period when, helped by quantitative easing as COVID-19 wound down and an increase in global liquidity, the KOSPI broke through 3,300 and the KOSDAQ re-topped 1,000. On April 12, 2021, the KOSDAQ closed at 1,000.65, finishig above 1,000; it was the first time in 20 years and 7 months that the KOSDAQ had closed above 1,000, since September 14, 2000, during the dot-com bubble.

At that time, the KOSDAQ market had a high proportion of growth stockssuch as bio, gaming, and secondary batteriesso volatility was elevated, and it was also a period when retail investors lined up to engage in ‘debt-fueled investing’ to dip into high-risk, high-return theme stocks. In September 2021, outstanding margin financing on the KOSDAQ surged to 11.7 trillion won, about 4 trillion won more than at the start of the year. Afterward, as the U.S. Federal Reserve (Fed) began in earnest to taper quantitative easing in November, the stock market cooled rapidly, and the assets of retail investors who had chased high-flying stocks with borrowed money remained nothing but debt.

The ‘quality’ of debt-fueled investing is also a problem. The 2021 rally occurred under global quantitative easing with relatively low interest rates, but brokerage margin financing rates now are well above 5%. In 2021, the Bank of Korea’s base rate was 0.5%, 2 percentage points lower than now. Considering the structure of brokerage margin financing, where longer tenors mean higher rates, the annual maximum approaches 10%. For borrowers, this means far more intense repayment pressure for the same amount borrowed, and in case of delinquency, the pain increases in proportion.

Recent market action is also worrisome in that when foreigners sell into the market, individuals targeting bargains repeatedly step in to absorb the supply. Foreigners, realizing gains, have been net sellers of 7.2 trillion won in just five trading days this month, while individual investors absorbed all of it with 7.4 trillion won in net purchases. Recently, both foreigners and individuals have turned net sellers, with institutions unusually absorbing the entire supply, but in the KOSPI market, foreigners have recorded net selling on every trading day in November except one.

Even as the scale of individuals’ debt-fueled investing is growing markedly, policy authorities have yet to show a clear response. While the government and ruling partywhich have ‘KOSPI 5,000 leap’ as a national agendacelebrate the KOSPI’s break above 4,000, financial and fiscal authorities are, if anything, openly encouraging participation in the domestic stock market.

Kwon Dae-young, vice chair of the Financial Services Commission, which bears responsibility for oversight of the capital market, said on a radio program in response to a question about whether he was concerned about an increase in debt-fueled investing among young people, “We have viewed it too negatively; it can be seen as a form of leverage,” then apologized after criticism that he was fanning debt-fueled investing.

An American Wall Street adage that encourages additional purchases even appeared in official fiscal authorities’ materials. In an ‘Economic Trends Briefing’ distributed by the Ministry of Economy and Finance on October 28, the ministry said that although the KOSPI had broken through 4,000, it remained undervalued, and mentioned a ‘Buy The Dip(Buy The Dip)’ strategy. ‘Buy The Dip’ refers to a strategy of buying when prices temporarily fall to take advantage of lower prices; the government cited claims by overseas investment banks advising a ‘Buy The Dip’ approach to the Korean market as evidence that the KOSPI still had considerable upside. Because the government publicly expressed optimism about the stock market, criticism poured in that this was irresponsible.

Within the Democratic Party of Korea, there has been a chorus of cheers over the KOSPI’s break above 4,000, including “an achievement of the Lee Jae-myung administration and the Democratic Party” (Chief Spokesperson Park Soo-hyun), “an achievement the president created together with the people” (Supreme Council Member Jeon Hyun-hee), and “an achievement brought about by the Democratic Party’s ‘capital market reform’ calling for the end of the Korea discount” (Floor Spokesperson Kim Hyun-jung).

Even as the surge halted and a roller-coaster market continued, the Democratic Party has been rolling out additional themes to prop up the market. Immediately after the KOSPI gave back the 4,000 level, news emerged from the ruling party that it had settled on cutting the top rate for separate taxation of dividend income to 25%, 10 percentage points below the government’s original plan (35%). The government also hinted at additional carrots, with remarks such as “we will devise measures to grant tax benefits for long-term investments by ordinary investors” (President Lee Jae-myung) and “we will reform the system so that the longer the investment period, the greater the benefit” (Deputy Prime Minister and Minister of Economy and Finance Koo Yoon-cheol).

By contrast, the financial investment income tax, abolished on the grounds of resolving the ‘Korea discount’ (undervaluation of the domestic stock market), shows no sign of being revisited despite the surge in stock prices. Last November, when he was the opposition leader, President Lee said, “According to principle and values, it would be right to push ahead, but the stock market is too difficult at present,” and decided to abolish the tax. At the time, there were loud calls within the party to abolish it, with comments such as, “If the KOSPI settles stably above 3,000 and heads toward 4,000, market participants will willingly accept a new tax” (Rep. Lee So-young). With the KOSPI having surpassed 4,000, this is the backdrop for calls to reopen discussions on introducing the tax.

Rep. Jin Sung-joon of the Democratic Party, a former chair of the party’s Policy Committee, argued, “Even those who advocated postponing the financial investment income tax said to introduce it once the KOSPI reached 4,000 in a stable manner,” adding, “If factors behind the Korea discount have been resolved, there is a need to introduce a reasonable financial investment income tax.” The People’s Solidarity for Participatory Democracy said, “Even while projecting a KOSPI 5,000 era, there has been no comprehensive discussion of tax reform,” and issued a public inquiy to Rep. Lee So-young regarding the timing for introducing the tax and the need to strengthen asset taxation.

The government’s position, however, is firm. At a full session of the National Assembly’s Special Committee on Budget and Accounts on November 11 regarding the possibility of reintroducing the financial investment income tax, Deputy Prime Minister Koo Yoon-cheol drew a line, saying, “That matter has already been decided in the National Assembly. We are not considering it.” Analysts say the government does not want to pour cold water on its achievement of boosting the stock market and is tempted not to risk losing the support it gained after declaring itself a moderate conservative party.

Jeong Se-eun, an economics professor at Chungnam National University, said, “As recent research confirms, with asset inequality steadily worsening, a broad overhaul of asset taxation needs to be carried out,” adding, “It is time to resist the temptation to lift approval ratings through tax cuts and focus on securing tax bases for expanded welfare spending, such as introducing a financial investment income tax.”