As Forced Liquidations Mount After Two Straight Days of Sharp Declines, Government Begins Emergency Response

After the stock market plunged for two straight days, the government launched an emergency response, including regulatory exemptions, to prevent forced liquidations, in which retail investors see their stocks sold off at fire-sale prices below market value. An expansion of forced liquidations could deepen investor losses.

A forced sale occurs when the appraised value of an investor's holdings falls below 140% of the outstanding loan balance. In such cases, retail investors must lock in losses while still carrying interest payments, and the market as a whole comes under even greater downward pressure. Margin lending stands at a high level, around 28 trillion won. To prevent a surge in forced sales, the government decided to suspend for three months regulations that strictly set collateral ratios.

During the four previous sessions of declines, retail investors were net buyers of Samsung Electronics and SK Hynix, but the market failed to stop falling even as they bought what they saw as bargains.

While the magnitude of the decline itself was not larger than in previous downturns, deteriorating cash flows at AI-focused companies have been cited as an obstacle. Jeong Yong-taek, senior research fellow at IBK Investment & Securities, analyzed that both high interest rates and a correction in excessive AI investment are factors restraining the economy.

The Bank of Korea is set to decide on its key interest rate later this month, followed by the U.S. Federal Reserve next month.