Investment with borrowing hit 44% of net purchases in Kosdaq

A surging number of people are making stock investments with borrowing as the Korean stock market is rebounding lately. The outstanding balance of debt that investors have borrowed from securities companies has surpassed 20 trillion won (15 billion U.S. dollars) for the first time in 10 months. In the tech-heavy Kosdaq market, individual investors who invest with borrowing account for nearly half of the total net purchases in the market so far this year. A significant number of people are still struggling due to heavy debt after making reckless investments in real estate, stock, and cryptocurrency during the period of soaring asset prices. It is concerning that a growing number of people are being attracted to the idea of speculative investment with borrowing again.

Stock investment with borrowing is more prevalent in the Kosdaq market, which has shown signs of overheating, than in KOSPI, the main bourse. The outstanding balance of individual investors’ borrowing from securities companies, which stood at 7.76 trillion won (5.83 billion dollars) late last year, surpassed 10 trillion won (7.5 billion dollars) this month. The amount of such debt is five times that of investment in the main bourse, whose total market capitalization is five times that of Kosdaq. Some 2.7 trillion won (2.3 billion dollars) of debts has been added in the Kosdaq market this year, which translates into 44 percent of individual investors’ net purchases in the market. The share of debt relative to net purchase has now reached an unprecedented level of 1.6 times the corresponding rate in 2020 when the local stock market was red hot.

The Kosdaq market has gained a whopping 27.9 percent so far this year. As rechargeable battery shares and several other items have soared, more people chose to borrow debts to make investments, fearing that ‘only they could miss out an opportunity to make money.’ However it is worrisome how long the rising stock market will remain strong after soaring due to investment with massive borrowing in a very short time. There may be massive ramifications if the market enters a correction phase in earnest and securities companies decide to sell investors’ collateralized shares to redeem their credit.

There are also looming signs that people are moving to borrow the maximum amount possible from lenders to invest in the real estate market all over again. The number of homes that were collateralized for mortgage loans amounted to 95,621 in March, surpassing the 90,000 mark for the first time in two years since March 2021. ‘Investment with borrowing and ‘maximum amount of home mortgage loans’ can result in bankruptcies among young people. The number of people who have filed for personal turnaround due to lack of capability to repay debts reached an all-time high of 11,228 last month, which represents a 50 percent gain from a year before. People in their 20s and 30s account for 46.5 percent of those who filed for personal turnaround last year.

Koreans have learned the grave risk of debts by experiencing the collapse of asset markets and interest rate hikes, but people seem to be forgetting weariness in recent months. Monetary authorities should make every effort to manage household debts at a permissible level to prevent mounting debts and potential delinquencies from becoming a detonator of a recession in the Korean economy. While debtors should be given a chance for a turnaround, the monetary authority should take a caretaken approach to ensure that those debtors will not develop expectations that if they wait before repaying, their debts will be written off. It is about time that all economic players, including households, companies, and the government, keep in mind the danger of debts again.