On July 28 and 29, South Korea’s Kospi index fell 16%, with circuit breakers halting trading both days. The sell-off was driven by investor doubts about the returns on AI infrastructure spending and concerns over rising competition in memory production, reported Al Jazeera.
What triggered the sell-off
Pressure on memory makers began a day before the Korea slump. On July 27, CXMT listed in Shanghai: shares surged 466% on debut, lifting its market capitalization above $488 billion. The company became the most valuable on China’s stock market. The IPO raised $8.6 billion — a record for the country’s semiconductor sector.
The MSCI Asia Pacific ex-Japan Information Technology index fell 4.7% that day. Industry leaders also dropped sharply. U.S. memory makers Micron and SanDisk slid 5% and 12% in New York, while SK Hynix fell 8.5% in Seoul.
The Korean market was further hit by SK Hynix’s July 28 report. The memory maker’s operating profit reached a record 60.54 trillion won ($41.25 billion), up 557% year over year, but missed the 64 trillion won consensus. The company also said it plans to raise capital expenditures to $31 billion. The stock fell 15% and extended losses the next day.
Concentration and leverage amplified the drop
SK Hynix and Samsung Electronics account for about half of Kospi’s market capitalization, up from roughly a quarter at the end of last year. On some days this year, the two stocks made up more than 80% of index trading volume, Reuters calculated. Both companies rallied on demand for memory in AI data centers: SK Hynix supplies HBM chips for accelerators, while Samsung remains a major contract manufacturer.
Until late May, South Korea had no single-stock leveraged ETFs — interested investors used overseas venues, mainly Hong Kong. Regulators launched 16 domestic products on May 27 to bring these investors back home. Assets in leveraged funds tied to Korean equities have since grown to $50 billion, RBC Wealth Management estimates. Net purchases by South Korean retail investors in the new products totaled 14 trillion won (about $9.4 billion) versus roughly 2 trillion won by foreigners, according to KB Financial Group.
Such funds buy or sell the underlying daily to maintain a target ratio. When the stock falls, they sell, adding pressure to the price. The Kospi volatility index has stayed above 80 for the past six weeks, with an all-time high of 97.99 on June 19. In prior decades, it did not rise above 30. The KODEX 2x leveraged fund on SK Hynix fell about 70% from its June peak, while Hong Kong’s CSOP product on the same stock dropped 83% in a month.
Credit protection on AI companies’ debt hit a record
The rout extended beyond equities. Demand for data-center memory is driven by capital expenditures at five major U.S. operators — Amazon, Meta, Microsoft, Google and Oracle. The cost of insuring against their default reached a record.
Five-year credit default swaps on a basket of these companies widened from 115 to 162 basis points, Offside Research data. Such contracts allow a bondholder to pay a periodic premium in exchange for a payout if the borrower defaults, so their price reflects perceived risk.
The widening varied by company. Protection on Oracle rose the most — above 215 basis points versus around 145 at the end of last year, noted Bloomberg. Barclays credit analyst Andrew Keches called Oracle swaps a working gauge of AI-debt concerns: the company has a large portfolio of contracted revenue, but a significant share is tied to OpenAI, which has yet to generate cash flow and has postponed a listing.
According to Sage Advisory, since September the group’s total U.S. dollar debt has more than doubled to over $360 billion, and free cash flow has turned negative. The five companies’ combined 2026 capital expenditures are tracking $725–$730 billion. Alphabet posted negative free cash flow for the first time in its history in the second quarter — minus $5.9 billion — despite 82% growth in its cloud unit.
Analysts at Real Investment Advice assessed the situation differently. In their view, 162 basis points for companies of this credit quality is far from levels that imply a risk of a credit event. The spread widening reflects hyperscalers’ shift to negative cash flow rather than a threat of nonpayment, they said.
South Korean authorities tightened rules and apologized
On the evening of July 29, South Korea held an emergency F4 meeting with the finance minister, the head of the Bank of Korea, and the chiefs of two financial regulators. Following the meeting, the Finance Ministry said retail investors’ exposure to leveraged funds will be capped at 20%, trading costs will rise, and investor qualification requirements will precede access to such products. A hike in the minimum deposit from 10 million to 30 million won, adopted in a previous package on July 16, will take effect early — on July 31.
Separately, the government is preparing a legal framework for crisis interventions modeled on Hong Kong, where asset managers can adjust fund leverage between one and two depending on market conditions.
The same day, Finance Minister Ku Yoon-chul and Financial Services Commission Chairman Lee Ok-won apologized, Reuters reported. Ku told parliament he regretted launching the product without sufficient preparation. Lee said in a separate session that the agency fell short of public expectations and takes the surge in volatility seriously. He also said the regulator is considering limiting access to these instruments to professional investors and, in drafting related legislation, reducing fund leverage.
Bitcoin barely moved
The turmoil in Korea’s stock market had little impact on cryptocurrencies. Over the past 24 hours, bitcoin fell 0.4%. At the time of writing, it is trading around $64,500.
At the same time, the sell-off hit stock perpetuals traded on crypto exchanges. On the evening of July 27, on the perp-DEX Hyperliquid, the SK Hynix-linked instrument from Trade.xyz fell about 19%, triggering $60 million in forced liquidations of long positions.
The move was caused by a single executed trade on an illiquid Korean premarket venue, whose quotes were relayed by several independent data providers. The Trade.xyz team said there was no system failure and no price manipulation, and pledged to compensate all trader losses.
Earlier in July, bitcoin and Ethereum held steady as AI chipmakers’ shares fell.
