South Korea’s stock market collapsed due to Bitcoin?

Author: Chen Hanxue, Wall Street News

Since the beginning of this year, Asian stock markets have experienced mixed gains and losses against the backdrop of a strong U.S. dollar.

Among them, some achieved a bull market in stocks denominated in local currencies at the expense of exchange rate depreciation, while others sacrificed part of the stock market gains at the expense of relatively stable exchange rates.

Only South Korea is a special case:

In terms of Korean won, the KSOPI has fallen by 10.0% this year. After taking into account the fall of the Korean won, the KSOPI in US dollar terms has fallen by 18.9%, both of which are the weakest in Asia.

The major declines occurred in the second half of the year. KSOPI once rose nearly 20% in 24H1, but wiped out all the gains in the second half of the year.

What happened in South Korea in the second half of the year?

Foreign capital fled and residents banded together to speculate in

currencies

From the perspective of capital flows, since the second half of this year, only institutions in South Korea have maintained net purchases in the stock market, while the residential sector has continued to reduce purchases.

Foreign investors are even more pessimistic. In November this year, foreign investors' net sales of Korean stocks reached 4.15 trillion won, marking the fourth consecutive month of net sales. In the two weeks since early December, another net 2.4 trillion won was sold.

The money that Korean residents took out of the stock market was largely used for "currency speculation."

Data from the Bank of Korea (BOK) show that as of November, the number of domestic cryptocurrency investors in South Korea has reached 15.59 million, an increase of 610,000 from the previous month. Currently, 30% of the 51 million Korean citizens are speculating in currencies.

The average daily trading volume of South Korea's five major cryptocurrency exchanges - UPbit, Bithumb, Coinone, Korbit, and GOPAX jumped from 3.4 trillion won in October to 14.9 trillion won in November, an increase of more than four times.

Koreans have always been keen on investing in cryptocurrencies.

In the first wave of the cryptocurrency bull market in 2017, about 5% of the population participated; in the second bull market in 2021, 10% of the population participated; today this proportion has expanded to 30%.

However, historically, the Korean stock index and Bitcoin prices have been positively correlated as a whole. Until October this year, this positive correlation was completely broken.

So South Korea’s stock market fell, and Bitcoin will take the blame?

Is export really strong?

In 2023, South Korea's exports will account for as much as 40% of GDP. As an export-oriented economy, exports are the barometer of the Korean economy.

Recently, South Korea's exports seem to be picking up.

November export data released by the Korea International Trade Association showed that export value increased by 1.4% year-on-year in November, maintaining growth for 14 consecutive months, but the trend has slowed down;

The export value data released by South Korean Customs for the first 10 and 20 days of December increased by 12.4% and 6.8% respectively year-on-year, indicating that South Korean exports should not be weak in December.

But behind this phenomenon, it is more likely that there is a head start caused by Trump’s concerns about tariffs.

Starting from the fundamentals of exports, South Korea's main export industries such as semiconductors, automobiles, and chemicals are all facing unfavorable prospects.

Chart: South Korea’s export structure in 2022

First, there is the weakness of semiconductors.

South Korea's local semiconductor giants Samsung Electronics and SK Hynix mainly focus on memory chips, which only account for about 30% of the entire semiconductor market. Compared with Taiwan, which has a complete supply chain including chip manufacturing, packaging and testing, South Korea's presence is weak.

Trend Force data shows that in the global foundry market in the second quarter of this year, TSMC’s share was 62%, while Samsung Electronics was only 11%. The gap between the two companies has widened from 36.5% in 2020Q3 to 51% today.

Insufficient policy support is the main reason. South Korea lacks government subsidies similar to those in the United States, China, and Taiwan, making it difficult to promote chip localization.

South Korea's key semiconductor materials, components and equipment are also highly dependent on overseas. Data from the Korean Customs Service show that among the 13 subdivisions of semiconductor equipment, more than half have long-term trade deficits.

In particular, the Yoon Seok-yue government chose to decouple from the Chinese market, causing South Korea's semiconductor industry, which was extremely dependent on the Chinese market, to plummet. Among China's chip imports in 2023, the proportion of chips shipped by Korean companies has dropped to 6.3%, which had previously remained above 10%.

Secondly, the automobile manufacturing industry is also at a clear disadvantage in the competition.

In 2023, the total global sales of Korean cars will exceed 8 million units, a year-on-year increase of more than 7%, but the share of new energy vehicles is only 9.3%.

China is currently the largest and fastest growing new energy vehicle market in the world. China's total automobile sales in 2023 will be 30.09 million units, with new energy vehicles accounting for 31.6%. The scale of China's automobile industry is nearly four times that of South Korea, and the share of new energy vehicles is more than four times that of South Korea.

Compared with German, American and Japanese car companies, which take the initiative to launch long-wheelbase, customized versions and other models based on the characteristics of Chinese consumers, Korean car companies are slow to act, have insufficient research and development efforts, and compound the transformation difficulties in new energy. Korean cars have become more and more popular in the market. The Chinese market is in a difficult situation.

Finally, exports of petroleum products (refining industry) are also facing certain downward pressure.

In November this year, SK Energy, South Korea’s largest refiner, announced its third-quarter results:

The operating loss of the refining business in the July-September quarter was 616.6 billion won ($450.2 million), the largest loss since the fourth quarter of 2022.

The company stated,

"We are in an unfavorable macro backdrop, with crude oil prices falling and the overall refined products market being squeezed...

Minimum operating rates for crude distillation units (CDUs) will continue to be maintained to prevent negative profit margins..."

Data from the London Stock Exchange shows that Asia's refining profit margins fell to a new low since the third quarter of 2022 from June to August this year.

Now, with a lot of prospects and potential for increasing production and disappearing demand, the market is bearish on oil prices for a long time, restricting refiners' output and export prospects.

The latest results of the 2025 Business Outlook Survey released by the Federation of Korean Enterprises show:

Due to widespread concerns about the status of exports, 65.7% of the companies surveyed stated that they have formulated business plans for next year, of which 49.7% have a business policy of "tightening operations", which is the highest level since the 2019 survey.

The Bank of Korea stated,

"Additional interest rate cuts will be made in 2025 to ease the downward pressure on the economy."

In the face of exchange rate headwinds, the Bank of Korea's unhesitating attitude further highlights its economic weakness.

Political turmoil continues

The recent outbreak of emergency martial law imposed by the South Korean president has made South Korea's already weak fundamentals even worse.

On November 29, the Budget and Final Accounts Committee of the Korean National Assembly, in the absence of members of the ruling National Power Party, forcibly passed the budget reduction bill, fully reducing the special activity expenses of the President's Office, the Prosecutor's Office, the Supervisory Office and the police, and at the same time significantly reducing The government's emergency reserve fund has been cut by a total of 4.1 trillion won, which means that the Yoon Seok-yue government will be shut down next year due to lack of money.

On December 3, South Korean President Yoon Seok-yue launched martial law, pushing the dispute between the government and the court to a climax.

The dispute between the government and the Yuan is actually a budget dispute. South Korea's financial pressure has been extremely severe in the past two years.

The Yin Seok-yue government enacted a tax cut policy for the wealthy in 2023, which led to the largest fiscal tax cut in South Korea's history. The settlement report of South Korea's Ministry of Strategy and Finance shows that South Korea's total tax revenue in 2023 will be 497 trillion won, a decrease of 77 trillion won from the previous year's settlement.

Yin Xiyue's move is actually "robbing the country to enrich the country."

Today, South Korea's fiscal deficit is still significant. In September this year, the deficit reached 52.89 trillion won, accounting for 2% of nominal GDP in 2023.

In response to the fiscal crisis, the Yoon government even cut South Korea's scientific research budget by 15% this year, the first time the South Korean government has made such a decision since 1991.

On December 15, the South Korean Congress officially passed the impeachment case against South Korean President Yoon Seok-yue. On the 16th, Han Dong-hoon, leader of South Korea’s ruling party, announced his resignation as party leader.

…

Even though the impeachment case has doomed Yin Xiyue's defeat, the future of South Korea's political situation has become more confusing, which may further aggravate the bearish sentiment of foreign investors.

With both domestic and foreign investors not optimistic about it, where will the Korean stock market go next year?