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Asia's Next Crash: Leverage Fault Lines Shift
8 Sep
Summary
- South Korean market saw a 39% collapse due to margin debt.
- India's margin trading book surged to $16.3 billion.
- China's margin balance is 2% of market cap, a red flag.
South Korea's equity market recently experienced a dramatic selloff, with the KOSPI index plummeting 39% between June 22 and July 30. This sharp correction was largely driven by the rapid accumulation and subsequent liquidation of margin loans taken by retail investors, fueled by AI euphoria. The forced selling cascaded through the market, erasing billions in value.
Margin loans have seen significant growth across other Asian markets as well. India's Margin Trading Facility book swelled to $16.3 billion by August 31, while China's outstanding margin balance reached $200 billion, and Japan's nearly doubled to over $35 billion over similar periods.
While these balances may appear small relative to total market capitalization, South Korea's experience showed that even 0.6% of market cap in leverage can cause immense damage. China's margin balance, at 2% of its market cap and 8% higher than its May 2015 peak, raises particular concern, echoing a past crash.
Concentration of leverage also presents risks. In South Korea, Samsung Electronics and SK Hynix accounted for nearly 31% of total KOSPI leverage. Chinese and Indian leveraged capital is concentrated in electronics and small/mid-cap stocks, respectively. Japan's margin buying also focuses on semiconductor and electronic components.
Regulators in these markets are taking steps to curb margin loan risks, including measures against volatile ETFs and increased margin requirements. However, rising interest rates in many regions, excluding China, may further pressure leveraged positions. Investors must remain vigilant as future market shocks may stem from different regional leverage concentrations.
