Concerns about a U.S. economic downturn and instability in the Middle East triggered a historic crash in the South Korean stock market, plunging it into panic. The benchmark KOSPI index fell by 234.64 points, marking its largest drop since the market’s inception in 1988, and an 8.77% decline, the biggest since the 2008 global financial crisis. The KOSDAQ dropped by 11.3%. Despite the activation of sidecars and circuit breakers to temporarily halt trading, panic selling persisted, erasing 235 trillion won in market capitalization. Even Samsung Electronics, the largest company by market cap, saw its stock fall by over 10%.
Japan’s Nikkei index plummeted by 12.4%, marking the largest drop in its history, while Taiwan’s market fell by 8.35%. Although Japan and Taiwan had been experiencing record highs and signs of overheating this year, South Korea, which had not seen significant gains, also suffered a severe decline. This highlighted South Korea’s vulnerability to external shocks. China and Hong Kong experienced relatively smaller declines, with the Shanghai Composite falling by 1.54% and the Hang Seng Index dropping by 1.46%. The higher export reliance of South Korea, Japan, and Taiwan on the U.S. likely increased their vulnerability to the U.S. economic downturn.
Foreign investors sold off more than 2.2 trillion won worth of stocks and futures in the KOSPI market in a single day, contributing to the market’s decline. Global investors often withdraw from the weakest markets first during financial instability. Despite government efforts to address the “Korea discount” by launching corporate value enhancement programs earlier this year, these measures have yielded no results. The weak fundamentals of the South Korean market may further drive foreign capital outflows.
In such a severe market crash, the failure of institutional investors, including pension funds, to play a stabilizing role is also problematic. While foreign investors led the sell-off in the KOSPI, domestic institutions worsened the decline by joining the selling pressure instead of defending against it. The government’s response has also raised doubts. Financial authorities merely reiterated their commitment to “strengthen market monitoring” without offering concrete measures. Without effective crisis management to reassure investors, the government will struggle to resolve the financial and stock market turmoil.
