After the US midterm elections, Koreans are completely panicked.

Author: Gelong

The results of the U.S. midterm elections have been finalized. The Democratic Party's “blue wave” swept through both chambers of Congress, also clinching governorships in key AI data center hubs such as Texas and Georgia.

The global AI computing power sector promptly crashed. Nasdaq chip stocks hemorrhaged losses. The Nikkei fell, and neither A-shares nor Hong Kong stocks were spared.

But interestingly, after the crash, the reactions from various governments were on completely different scales. When other markets fell, there were no emergency meetings or statements from key officials.

Korea alone held an emergency market meeting attended by the Vice Prime Minister and Finance Minister, with the Chairman of the Financial Services Commission present and the Deputy Governor of the Bank of Korea accompanying them. Following the meeting, it was announced that the requirement to maintain the broker credit financing collateral ratio at 140% would be waived for three months.

On the same day, the Korea Exchange activated its Sidecar circuit breaker mechanism to halt programmatic selling orders. Why did Korea panic so much?

Leverage Traders Buried Alive and the Risk of a Stampede

Let’s look at some data first. According to statistics from KOSCOM, a subsidiary of the Korea Exchange, during the month leading up to the crash (October 6 to November 5), South Korean retail investors net purchased 5.83 trillion KRW worth of Samsung Electronics and 3.36 trillion KRW of SK Hynix.

These two figures rank first and second among all listed stocks and ETFs in Korea. Note the timeframe: this wasn’t chasing the trend when the AI mania first kicked off earlier this year; this was buying the dip on the eve of the crash.

On November 5, KOSPI had already dropped 5.28%, yet retail investors kept rushing in. When the market opened the next day, KOSPI plummeted right through the 5,000-point mark.

Chart: Steep opening plunge of the KOSPI index

What kind of capital is this? Korean media themselves used the term “ant army.” Behind it lies a vast amount of borrowed money.

Retail investors in South Korea are globally infamous for their aggressive use of leverage, with single-stock leveraged ETFs being their most convenient tool. By July this year, the Financial Services Commission (FSC) was forced to intervene: the margin threshold for single-stock leveraged ETFs was hiked from 10 million KRW to 30 million KRW overnight, new product listings were suspended, and advertising was banned.

In August, further measures were added: new investors wanting to trade leveraged ETFs must complete a five-day simulation totaling five hours before an account can be opened. The fact that regulators panicked so much in July indicates that retail leverage positions had grown to a size that even authorities found terrifying.

Data from the Korea Institute for Capital Markets (KICM) is even more direct: As of mid-June, retail investors’ cumulative net purchases of single-stock leveraged ETFs reached 8.2 trillion KRW, accounting for 60% of the assets under management for these products. In other words, 60% of the funds in leveraged ETFs belong to retail investors.

During the sell-off in July, the AUM of 14 individual stock leveraged ETFs tracking Samsung and Hynix shrank directly from 15.9 trillion KRW at the end of June to 9.3 trillion KRW, evaporating 41%. The top four products suffered valuation losses of 8.8 trillion KRW in less than two weeks. This wasn’t a correction; it was leverage positions being buried alive.

Above retail investors lies another layer. The National Pension Service (NPS) of South Korea, the world’s third-largest sovereign wealth pension fund, holds Koreans’ retirement savings. To what extent does it hold heavy positions in Samsung and Hynix?

As of October 15, the market value of NPS holdings in 287 listed companies where it holds over 5% dropped from 515 trillion KRW at the end of June to 333 trillion KRW, shrinking by 182 trillion KRW, a 35% decline.

KOSPI had just hit a historical closing high of 9,114 points on June 22. By mid-October, it had fallen 39%. The NPS held onto its positions at peak levels and failed to exit.

Thus, the situation facing the South Korean government is: millions of retail traders rushed in at highs using leverage, the national pension fund is deeply trapped in heavy positions in the same batch of stocks, and a handful of equities account for half of KOSPI’s market capitalization.

At this juncture, news came from the U.S. that Democrats would restrict power allocation and approvals for data centers, suggesting that AI computing expansion might slow down. Stock prices couldn't hold up, triggering a negative chain reaction. If this domino effect isn't cut off in time, it will lead to a liquidity crunch. The South Korean government's waiver of the broker collateral ratio requirement aims precisely to break this cycle.

Vulnerable Currency and Dependence on Foreign Capital

In essence, South Korea's stock market is not merely a financial market but also an amplifier of social sentiment. The spectacle of nationwide retail stock trading in Korea is famous worldwide.

This year, precisely catching the windfall of AI memory chips, millions of ordinary Koreans bet their years of saved wages, wedding funds, and even borrowed capital onto just two national champion stocks.

But within South Korea’s political logic, such sentiment carries a very high risk coefficient. Korean politicians know better than anyone that once the stock market crashes, the resulting tsunami of public opinion hits more directly than any diplomatic crisis.

Then there’s the won. South Korea is a small open economy, and the won is not a safe-haven currency. When global risk appetite cools, foreign capital exits the Korean stock market faster than anywhere else. Selling the won and buying dollars drags the exchange rate straight down.

South Korea also relies almost entirely on imports for energy and raw materials. A depreciation of the won immediately sparks imported inflation. A falling stock market combined with a weakening currency and rising inflation—a deadly triple combo—is fatal for an economy of South Korea’s size.

Another layer of logic is added here: the importance of foreign capital to the Korean stock market. As of June 2026, foreign investors held approximately 37.8% to 38.9% of the total market capitalization of the Korean stock market, with U.S. investors accounting for about 42% of foreign holdings.

Foreign ownership in core tech stocks like Samsung Electronics and SK Hynix had long exceeded 60%, remaining around 46.70% and 50.84% respectively by early August, only dropping to lower levels until early October.

In terms of trading volume, this reliance is amplified to an extreme. As of October 14, foreign investors had cumulatively net sold approximately 203.7 trillion KRW in the main board of the KOSPI market this year, with Samsung Electronics and SK Hynix alone accounting for over 100 trillion KRW in net sales.

Domestic capital in Korea is limited. Without foreign capital support, the manic rally seen in the first half of the year would be hard to achieve. But while foreign capital can enter, it can also leave. Korean stocks are merely an arbitrage playground for them, never a final destination.

More critically, domestic retail and institutional investors are far less sensitive to shifts than foreign capital. The latter can maneuver in at market lows, while the former typically wait until prices have already surged before entering, ultimately becoming the bagholders when they eventually retreat.

Therefore, when South Korean government officials stepped forward to make statements, they weren't just speaking to retail investors but primarily to foreign capital: Don't run. The fundamentals are fine, and we will backstop it.

Semiconductor Lifeline and Deep Structural Imbalance

At its core, the U.S. midterm election was merely a matchstick; South Korea's economic structure is the fundamental cause of the out-of-control fire.

Compare that to Japan, which has automotive, precision machinery, and general trading companies. Even if the TOPIX falls, Toyota and Sony wouldn't collapse simultaneously. The U.S. boasts the world's largest domestic demand market and tech ecosystem; even if Nasdaq drops, the stock prices of Apple, Microsoft, Google, and Meta wouldn't halve at the same time.

What about South Korea? It doesn't lack other industries, but its dependence on semiconductors is simply too great.

In 2025, South Korea's semiconductor exports totaled $173.4 billion, representing 24.4% of its total exports. In January 2026, the share of semiconductor exports in South Korea's total exports broke through 30% for the first time, reaching 31.2%. By May, this figure jumped to 42.3%, hitting a record high. In early October, the proportion of semiconductors in exports approached 47% further still.

In other words, South Korea's export growth is propped up almost entirely by chips, with all other categories combined showing contraction. More granular data shows that in South Korea's semiconductor exports, memory chips account for 75%, system semiconductors make up only 20%, and wafers and components constitute 5%.

Consider another data point regarding GDP growth. In Q3 2026, South Korea's GDP grew 1.0% quarter-on-quarter, nearly three times the central bank's previous forecast, with computer and electronic equipment including semiconductors contributing roughly half of the GDP increment.

Half of a nation's quarterly economic growth coming from a single industry. And the products of this industry are heavily concentrated in memory chips, customers are overwhelmingly focused on U.S. tech giants, and demand is tightly bound to the AI capital expenditure cycle.

Data from Morgan Stanley shows that in South Korea's exports to the U.S., the share of automobiles dropped from 36% in 2024 to 13%, while the share of semiconductors skyrocketed from 10% to 28%. Morgan Stanley has even directly labeled South Korea's exports to the U.S. as a leading indicator for U.S. AI investment, noting that Korean exports lead U.S. equipment investment indicators by one to two months.

The tighter this binding, the greater South Korea's volatility becomes when U.S. policy pivots.

Bailout Measures Unlikely to Curb Structural Pangs

Facing the same policy headwinds and sharp stock market declines, you can see that while other markets fell, trading continued as usual, and hedging strategies remained active.

Only in South Korea did a sharp fall prompt the Vice Prime Minister to convene meetings, the FSC to issue statements, exchanges to trigger circuit breakers, and brokers to be ordered against unwinding positions. This isn't market stabilization; it's firefighting.

The result of overly betting on a single export industry is that when the U.S. sneezes, South Korea catches a severe cold. Furthermore, this time the U.S. didn't just sneeze; it delivered a harsh kick right to the vital weak point of AI infrastructure. How could South Korea not panic given that?