SEOUL: South Korea’s abrupt reversal over single-stock leveraged funds has revived a broader question for global investors: whether unpredictable policymaking itself contributes to the country’s long-standing equity market discount.
The speed with which authorities moved from approving the products to tightening the rules – amid conflicting comments from senior officials – has turned the episode into a test of regulatory credibility.
The concern is not that regulators strengthened safeguards for high-risk products, but that investors had little visibility over what would trigger intervention, how severe the response might be or whether the measures announced would be final.
“The market itself was already uncertain, and when a regulator says it will take action without indicating whether that action will be strong or limited, the uncertainty can only grow,” an executive at an overseas exchange-traded funds (ETF) manager said.
A single reversal may have little bearing on South Korea’s long-term investment case. Repeated policy shifts, however, could raise the premium that investors demand for holding South Korean assets, even when the fundamentals remain intact.
South Korea allowed domestically listed leveraged products tied to Samsung Electronics and SK Hynix in late May, arguing that South Korean investors were already buying comparable instruments overseas.
Within weeks, however, concerns that the products were amplifying swings in the country’s two index heavyweights prompted calls for tighter safeguards.
A Seoul-based equity strategist at a foreign brokerage said the products had aggravated short-term volatility but were unlikely to pose systemic risks.
“The selling makes others sell further. That drags down the market, which has happened recently a few times,” the strategist said.
The policy tone shifted sharply on June 22, when Financial Supervisory Service governor Lee Chan-jin said the launch had been prepared too hastily and had done little to curb capital outflows.
“Perhaps I should have gone so far as to lie down and block it,” Lee said, expressing regret that he had not done more to prevent the launch.
Four days later, the Financial Services Commission (FSC) defended the original rationale, saying the launch had diverted some trading away from Hong Kong-listed products.
President Lee Jae Myung later called for follow-up measures, while presidential policy chief Kim Yong-beom said the instruction did not signal another package.
Authorities then suspended new listings and promotions, raised the minimum retail deposit from 10 million won to 30 million won and moved to increase the minimum trading unit.
The FSC said it was also preparing tighter investor eligibility rules and caps on individual investments if demand failed to cool. The positions were not necessarily irreconcilable.
But the sequence left investors unsure of whether the latest restrictions marked the final policy stance or another interim step.
The problem was not that the rules changed, but that investors had little visibility over what would trigger intervention or how far it might go.
A South Korea equity research head at a global brokerage cautioned against blaming the products for heavy selling, saying the outflow was tied more closely to mechanical factors. — The Korea Herald/ANN
