1.2 Million Margin Calls: Korea's Stock Selloff Turns Into a Deleveraging Spiral

South Korea's stock market slump is no longer just about falling share prices. It is now unfolding into a broader deleveraging cycle, with more than 1.2 million leveraged accounts hitting margin call levels.

That means roughly one in every 30 Korean adults is now exposed to potential forced selling, underscoring how deeply retail leverage had become embedded in the market.

Selling pressure has accelerated throughout July.

Forced liquidations have reached KRW 344.2 billion this month, while the daily liquidation value on July 9 jumped nearly fivefold from the previous session. Retail margin balances have also fallen to their lowest level since June 2020, reflecting a sharp pullback in leveraged positions.

The KOSPI dropped 6.37% on Wednesday after suffering an almost 9% plunge earlier in the week. Heavyweight chipmakers led the decline, with SK Hynix and Samsung Electronics posting steep losses as leveraged positions were unwound.

One reason the selloff has intensified is the heavy concentration of margin financing in these market leaders. As their share prices declined, forced selling gathered pace and added fresh pressure to the broader index.

The speed of deleveraging has also increased sharply.

The forced liquidation rate has climbed to more than 10%, compared with an average of 2.1% over the previous six months, suggesting that selling is no longer driven purely by sentiment but increasingly by margin requirements.

Another concern is that fresh buying power appears to be drying up.

Major commercial banks have already used most of their household lending capacity, limiting the ability of retail investors to add new positions. At the same time, regulators are preparing tighter rules on leveraged ETFs as authorities look to reduce systemic risks in the market.

Despite the sharp decline, cheap valuations alone may not be enough to stabilise the market.

For now, investors are watching for signs that forced selling is beginning to ease. Until margin pressure subsides, volatility in Korean equities is likely to remain elevated.