Author: Curry, Deep Tide TechFlow

How volatile has the South Korean stock market been lately?

The KOSPI index rose from 4,000 points to nearly 8,000 points in six months. According to the JoongAng Ilbo, the staff restrooms at a department store in Gangnam-gu, Seoul, are packed with employees watching the market from inside, as they close at 3:30 PM.

By mid-May, the outstanding balance of loans borrowed by South Korean retail investors from brokerage firms to speculate in stocks had surged to a record high of 36.47 trillion won (approximately 170 billion yuan), doubling in a year.

But the money in this festivities came in a rather strange way.

According to the Korea Herald, the three major life insurance companies in South Korea saw a total of 4.9 trillion won (approximately 23 billion yuan) in policy cancellations in the first quarter, a 16.3% increase year-on-year. Savings-type life insurance policies saw the largest number of cancellations, rising by 23.2%.

Savings-type life insurance is meant to leave money for your family. Surrendering the policy guarantees a loss, as the book value will be lower than the premiums paid, yet more and more people are choosing to surrender it at a loss.

Where did the withdrawn money go? Most likely, it went into another stock account.

Data obtained by South Korean lawmakers from the Financial Supervisory Service shows that, as of the end of the first quarter, South Korean retail investors borrowed 27 trillion won from the top ten securities firms to speculate in stocks, of which more than 60% (62.3%) was borrowed by people over 50 years old.

The debt of people aged 60 and over increased from 3.95 trillion won to 8.02 trillion won in one year, the fastest increase among all age groups.

By surrendering insurance policies and buying stocks, an entire generation of South Koreans is using future money to buy stocks at the current low.

Borrowing money because of mad cow disease?

In a bull market, leveraging is called "amplifying returns," while in a bear market, it's called "accelerating to zero." The elderly South Koreans have already experienced this rollercoaster ride once.

In early March this year, the United States and Israel launched a joint airstrike on Iran, causing panic in global capital markets. The South Korean stock market triggered circuit breakers for two consecutive trading days, with the KOSPI plummeting by nearly 13%.

According to a report by the Financial Supervisory Service of South Korea at the end of March, during that market downturn, among the 4.6 million retail investor accounts nationwide, those who used margin loans lost an average of 19%, while those who did not lost 8.2%. Those who borrowed money to trade stocks lost 2.3 times more than those who did not borrow money.

When broken down by age group, leveraged account holders aged 60 and above suffered the worst losses, with an average return of -19.8%, the lowest among all age groups.

Even worse is yet to come, called forced liquidation.

Leveraged accounts have a liquidation line. If the value of the stocks in your account falls below this line, the brokerage firm will sell them on your behalf without consulting you. The Financial Supervisory Service of South Korea received numerous complaints from retail investors at the time, such as "My stocks were sold without my knowledge" and "I was charged exorbitant interest rates"...

A significant portion of these complaints came from elderly people who were unfamiliar with the trading rules. However, those retail investors who bought in during the March circuit breaker event ultimately profited.

The South Korean stock market recovered all its losses in just over two months and has continued to rise ever since. Those who weathered the storm in March have all seen their accounts recover, and some may even have made a profit.

If there are fluctuations and room for growth, then this is a successful "getting on board" experience, even if you borrowed money to get on board.

Thus, this successful experience becomes an excuse for even bolder moves next time. After the circuit breaker in March, margin loans held by South Korean retail investors not only did not shrink, but instead continued to rise. Public data shows that total margin loan accounts surged to 25 trillion won at the end of April, a record high; and continued to rise to 36.47 trillion won in mid-May.

In a month and a half, retail investors in South Korea borrowed an additional 11 trillion won (approximately 52 billion yuan).

On a personal level, in early May, a South Korean civil servant posted a screenshot on the South Korean workplace community Blind:

He went all in on SK Hynix with 2.3 billion won (approximately US$1.7 million) in his account, of which 1.7 billion won was borrowed from a brokerage firm. In other words, he had 600 million won of his own funds and leveraged 1.7 billion won.

Four days later, he updated his post, saying he had already earned 267 million won.

On the same day, another Seoul subway employee in her 20s posted that rather than miss out on this wave, she would rather "completely collapse" and go all in, using 150% margin financing to buy SK Hynix. The borrowed money was then used as principal, and she borrowed again.

These kinds of posts are discussed daily on the Korean Blind community.

Regulators weren't unaware of the FOMO frenzy. At the end of March, the Financial Supervisory Service of South Korea convened major securities firms to strengthen risk control, and some firms temporarily restricted new margin loans for overheated stocks. However, the money already lent out was still there, accumulating interest daily at an annual rate of 7% to 9%.

Based on an 8% interest rate, retail investors in South Korea pay nearly 3 trillion won in interest to brokerage firms annually, equivalent to approximately 14 billion yuan.

However, leveraging at 60 and leveraging at 30 are two different things. If a 30-year-old goes bankrupt, they still have decades of salary to slowly make up for it. A 60-year-old who goes bankrupt may lose their entire retirement savings, leaving them only with exhausted physical strength and the reality of being unable to earn money again.

If another circuit breaker is triggered, the outcome of "recovering in just over two months" may not be possible.

Information circulating among the elderly in Tagu Park

Like all retail investors in South Korea, the elderly in South Korea borrowed money to bet on Samsung Electronics and SK Hynix.

Samsung Electronics has risen 138% this year, and SK Hynix has risen 189%. KOSPI as a whole has risen 80%, but excluding these two companies, the remaining stocks have only risen 30%.

These two companies together account for over 43% of the KOSPI index. In other words, if these two companies rise, the entire South Korean stock market will rise.

Most of the money borrowed by the elderly went into these two companies. A quarter of the net purchases by South Korean retail investors this year went to these two companies. The remaining three-quarters were spread across other stocks, but the overall increase in those other stocks this year was only 30%.

Tagol Park in Jongno-gu, Seoul, is one of the city's oldest public parks. Young people rarely visit. Its regulars are a group of retired elderly people who come every morning to drink free coffee, chat, play chess, and let time seem to stand still.

According to South Korea's Kyunghyang Shinmun, the topic surrounding Tagol Park has changed this year.

While drinking coffee, someone might say, "My Samsung account has gone up again." A chess player might ask, "Did you buy Hynix?" A 77-year-old man told his junior high school classmate that Samsung and Hynix had recently performed well, and he had made a small profit in his account.

In a corner of Tagu Park, a large number of elderly people are playing chess.

Image source: Seoul News

However, he did not say whether he borrowed money or how much he borrowed.

The topics circulating in the senior citizens' park certainly didn't come out of nowhere; they're somewhat like information exchange at a village intelligence station. For example, one senior hears in the park that another senior made money, so the next day they check their own account. Then they start trying to borrow a little. And then, they might borrow more and more.

But if you were to ask why elderly South Koreans would be using leveraged stock trading accounts, it would actually be related to their retirement security.

According to OECD (Organisation for Economic Co-operation and Development) data, South Korea's relative poverty rate among its population aged 65 and over is approximately 40%, the highest among OECD member countries. The retirement replacement rate of the National Pension (South Korea's version of pension) has long been low, averaging around 50% in OECD countries, while in South Korea it is only about 31%.

The labor force participation rate of the population aged 65 and over is the highest among OECD countries, which means that a considerable number of elderly people in South Korea have to continue working after retirement.

Therefore, free coffee is usually available in Tagol Park, which is essentially a form of social welfare in South Korea. A cup of coffee costs less than 500 won, which is part of daily life for elderly people whose monthly pension is less than 1,000 US dollars.

But the elderly people at Ta Bone Park are no longer just there for free coffee and chess. They might also have Kopi Luwak (KOSPI) quotes on their phones.

Since taking office, South Korean President Lee Jae-myung has vigorously promoted stock market participation among the general public. He publicly refers to himself as a "big ant," a colloquial term in South Korea for retail investors. He has included the KOSPI index breaking 5000 points in his policy objectives.

In other words, the practice of elderly people borrowing money to buy stocks is, to some extent, encouraged by the South Korean government.

What the old man is really betting on is an anxiety. If he doesn't get on the train now, he'll miss it.

This is their last chance before retirement. South Korea's semiconductor industry is cyclical, having experienced more than one dramatic boom-and-bust cycle over the past thirty years.

SK Hynix suffered a loss of 4.26 trillion won in 2023, its worst performance in a decade. The speed at which it went from massive losses to a quarterly operating profit margin of 72% (surpassing Nvidia) in just two years suggests that the cycle may be about to reverse.

For these elderly people who borrow money to speculate in stocks, time may be the most precious thing.

The elderly residents of Tagu Park are diligently seizing the benefits of the new version. Coffee is still free. Their mobile phones are constantly buzzing with news updates.