KOSPI Falls Below 8,000, but Debt-Funded Stock Buying Climbs by 1.7 Trillion Won

KOSPI drops below 8,000, but debt-funded investing rises instead

Overdraft loans and margin credit up 1.7 trillion won ($1.23 billion) in five days

Investors appear to be betting on a short-term rebound in a volatile market

Overdraft loans at South Korean banks rose by more than 1.4 trillion won ($1.01 billion) in the first week of June. Margin loans at brokerages increased by more than 300 billion won ($217 million) over the same period. The move suggests investors are stepping up debt-funded stock buying in hopes of a short-term rebound as market volatility intensifies.

Data from the financial industry on June 10 showed outstanding overdraft loans at South Korea’s five largest commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — rose to 42.9516 trillion won ($31.12 billion) on June 8 from 41.5324 trillion won ($30.10 billion) at the end of May. That was an increase of 1.4192 trillion won ($1.03 billion) in five trading days.

Overdraft borrowing kept climbing even as the market corrected. On June 4, when the KOSPI closed at 8,639.41, outstanding overdraft loans stood at 42.343 trillion won ($30.68 billion). By June 8, when the index had fallen to 7,484.41, the balance had risen to 42.9516 trillion won ($31.12 billion), up 608.6 billion won ($441 million) in two trading days.

Margin loans at securities firms also surged over the same period. Data from the Korea Financial Investment Association showed margin balances in the benchmark stock market rose to 28.3264 trillion won ($20.53 billion) on June 8 from 28.0245 trillion won ($20.31 billion) at the end of May, an increase of 301.9 billion won ($219 million). Experts say investors likely used borrowing from banks and brokerages to buy stocks after the sharp selloff, betting on a rebound.

Debt-fueled investing has jumped sharply each time the market has come under pressure this year. A notable example came in late February, when the outbreak of war in the Middle East involving Iran rattled sentiment. After the KOSPI closed at 6,244.13 on Feb. 27, the index fell to 5,583.90 on March 5. During that span, overdraft loan balances at the five major banks climbed to 40.7227 trillion won ($29.51 billion) from 39.4249 trillion won ($28.57 billion), an increase of more than 1 trillion won ($724 million).

The KOSPI first rose above 8,000 on an intraday basis on May 15 and set a record closing high of 8,801.49 on June 2. It has since retreated on rising interest rates and weakness in semiconductor shares, closing at 7,730.82 on June 10. That left the index down more than 12% from its recent peak. The securities industry says South Korean stocks could come under further pressure if the possibility of another increase in US benchmark interest rates becomes reality.

Bae Tae-ung, Korea Economic Daily reporter, btu104@hankyung.com