Has the South Korean stock market been brought down by Bitcoin?

Author: Chen Hanxue, Wall Street Watch

Since the beginning of this year, Asian stock markets have shown mixed results against the backdrop of a strong dollar.

Among them, some have achieved a bull market in local currency at the cost of currency depreciation, while others have sacrificed part of their stock market gains for relatively stable exchange rates.

Only South Korea is an exception:

In terms of Korean won, the KOSPI index has fallen by 10.0% this year. Considering the depreciation of the won, the KOSPI has dropped by 18.9% in USD terms, making it the weakest in Asia.

The main declines occurred in the second half of the year. The KOSPI once rose nearly 20% in the first half, but all gains were erased in the second half.

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

Foreign Capital Exodus, Residents Grouping to Speculate on Cryptocurrency

From the perspective of capital flows, since the second half of this year, only institutional investors in South Korea have maintained a net buying scale in the stock market, while the resident sector has been continuously reducing purchases.

Foreign investors are even more pessimistic. In November this year, foreign investors net sold South Korean stocks worth 41.5 trillion won, marking four consecutive months of net selling. In the two weeks starting from early December, they net sold another 24 trillion won.

The money that South Korean residents have withdrawn from the stock market has largely gone into "speculating on cryptocurrency."

According to data from the Bank of Korea (BOK), 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 South Koreans are involved in cryptocurrency speculation.

The daily trading volume of South Korea's top five cryptocurrency exchanges—UPbit, Bithumb, Coinone, Korbit, and GOPAX—has surged from 34 trillion won in October to 149 trillion won in November, more than quadrupling.

South Koreans have always been keen on investing in cryptocurrency.

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

However, historically, the South Korean stock index has shown a positive correlation with Bitcoin prices, until this positive correlation was completely broken in October this year.

So, is Bitcoin to blame for the decline in the South Korean stock market?

Exports, Are They Really Strong?

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

Recent data suggests that South Korea's exports may be showing signs of recovery.

According to the Korea International Trade Association, November export figures showed a year-on-year increase of 1.4%, maintaining growth for 14 consecutive months, although the trend has slowed down;

Data from South Korea's customs for the first 10 and 20 days of December showed year-on-year increases of 12.4% and 6.8%, respectively, indicating that December exports from South Korea should not be weak.

However, this phenomenon is more likely a result of preemptive actions driven by concerns over Trump-era tariffs.

From the perspective of export fundamentals, South Korea's main export industries—semiconductors, automobiles, and chemical products—are all facing unfavorable prospects.

Figure: South Korea's Export Structure in 2022

First, there is the weakness in semiconductors.

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

Data from Trend Force shows that in the second quarter of this year, TSMC held a 62% share of the global foundry market, while Samsung Electronics only had 11%, with the gap between the two companies widening from 36.5% in Q3 2020 to 51% now.

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

Key materials, components, and equipment for South Korea's semiconductor industry are also highly dependent on overseas sources. Data from the Korea Customs Service shows that in 13 sub-sectors of semiconductor equipment, more than half have long been in a trade deficit.

Particularly, the Yoon Suk-yeol government has chosen to decouple from the Chinese market, leading to a steep decline in South Korea's semiconductor industry, which is heavily reliant on China. In 2023, the share of chips shipped by South Korean companies in China's chip imports has dropped to 6.3%, down from over 10% previously.

Secondly, the automotive manufacturing industry is also clearly at a disadvantage in competition.

In 2023, global sales of South Korean cars exceeded 8 million units, a year-on-year increase of over 7%, but the market share of new energy vehicles was only 9.3%.

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

Compared to German, American, and Japanese automakers who actively introduce long-wheelbase and customized models based on Chinese consumer preferences, South Korean automakers have been slow to respond, lacking sufficient R&D efforts, and facing transformation difficulties in the new energy sector, making it challenging for South Korean cars in the Chinese market.

Finally, the export of petroleum products (refining industry) is also facing certain downward pressure.

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

In the July-September quarter, the refining business reported an operating loss of 616.6 billion won (450.2 million USD), the largest loss since Q4 2022.

The company stated,

"We are in an unfavorable macro environment, with falling crude oil prices and overall pressure on the refining product market… We will continue to maintain the minimum operating rate of crude distillation units (CDUs) to prevent negative profit margins…"

Data from the London Stock Exchange shows that from June to August this year, refining margins in Asia fell to their lowest level since Q3 2022.

Now, under the influence of abundant production prospects and gradually fading demand, the market is bearish on oil prices in the long term, restricting the production and export outlook for refiners.

The latest survey results from the Korea Federation of Industries on corporate management outlook for 2025 show:

Due to widespread concerns about export conditions, 65.7% of surveyed companies have already formulated their business plans for next year, with 49.7% of companies adopting a "tight management" approach, the highest level since the 2019 survey.

The Bank of Korea stated,

"In 2025, additional interest rate cuts will be implemented to alleviate downward pressure on the economy."

Faced with exchange rate headwinds, the Bank of Korea's resolute actions further highlight the weakness of its economy.

Political Turmoil Continues

The recent emergency martial law incident involving the South Korean president has further exacerbated the already weak fundamentals of South Korea.

On November 29, the South Korean National Assembly's Budget and Settlement Committee forcibly passed a budget cut proposal in the absence of ruling party members from the People Power Party, fully cutting special activity funds for the presidential office, the prosecution, the Board of Audit and Inspection, and the police, while significantly reducing government emergency reserves, totaling a cut of 41 trillion won, which means that the Yoon Suk-yeol government will face a shutdown next year due to lack of funds.

On December 3, President Yoon Suk-yeol declared martial law, escalating the conflict between the government and the assembly.

The conflict between the government and the assembly is essentially a budget dispute, as South Korea has faced severe fiscal pressure in recent years.

The Yoon Suk-yeol government implemented tax cuts for the wealthy in 2023, leading to the largest decline in fiscal revenue in South Korea's history. The Ministry of Economy and Finance's settlement report shows that South Korea's total tax revenue in 2023 was 497 trillion won, a decrease of 77 trillion won from the previous year.

Yoon's actions can be seen as "robbing the country to enrich the wealthy."

Currently, South Korea's fiscal deficit remains significant, with the deficit reaching 52.89 trillion won in September, accounting for 2% of the nominal GDP for 2023.

To address the fiscal crisis, the Yoon government even cut this year's research budget by 15%, marking the first time since 1991 that the South Korean government has made such a decision.

On December 15, the South Korean National Assembly officially passed an impeachment motion against President Yoon Suk-yeol. On the 16th, the leader of the ruling party, Han Dong-hoon, announced his resignation from the party leadership.

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Even though the impeachment motion has sealed Yoon Suk-yeol's fate, the future of South Korea's political landscape is even more uncertain, which may further exacerbate foreign capital's bearish sentiment.

With both domestic and foreign investors pessimistic, where will the South Korean stock market head next year?