Freefall Without Wings: The Resurgence of the 'Korea Discount'

The stock market declined for seven consecutive trading days through yesterday (October 15). The KOSPI index, which had surpassed the 7,000-point mark, plummeted in a single breath to the 5,500 level. This week alone, selling sidecars were triggered twice and a circuit breaker once. Despite a modest rebound today (October 16), market anxiety remains pervasive. Global investment bank Goldman Sachs went as far as to state that this is "a far more serious phase than a typical short-term correction." Over the past 20 years, panic-selling episodes that wiped out 21% of the index across seven trading sessions occurred only twice: a 20.5% drop in March 2020 at the onset of the COVID-19 pandemic, and a 15.1% drop in August 2011 during the downgrade of the U.S. sovereign credit rating. What lies behind this historic plunge?
Global macroeconomic variables and fundamental concerns across key industries are simultaneously weighing on the stock market.

① U.S. Inflation Rebound and Pressure from Delayed Rate Cuts

Higher-than-expected U.S. Consumer Price Index figures have reignited fears over prolonged high interest rates. An extended high-rate environment constricts global liquidity and stimulates risk-aversion sentiment toward assets such as emerging market equities.

② Resurfacing Doubts Over AI Profitability

Anxiety is mounting over investments in AI infrastructure, which had been driving valuations across global big tech and semiconductor sectors. Market doubts have flared up once again over whether real profit generation from AI infrastructure investments will materialize as swiftly as expected. As the possibility of big tech firms pacing their capital expenditures resurfaced, a share price correction was triggered across the entire global tech value chain.

③ Threat of Mid-to-Low-End Semiconductor Supply from China's CXMT and Others

Concerns have also emerged that the production yields and process migration speeds of Chinese memory makers, led by ChangXin Memory Technologies (CXMT), are advancing faster than anticipated. In particular, CXMT's announcement that it aims to commercialize next-generation DRAM technology within this year dealt a direct blow. This heightened worries that an oversupply in the general-purpose DRAM market would sharply erode profit margins for South Korean chipmakers.
While multiple headwinds hit the domestic stock market, all are global issues, meaning other markets were bound to be affected as well. Nevertheless, the scale of the sell-off in South Korea's market has been extraordinary. While the KOSPI sank 21% over seven trading days, the U.S. S&P fell 4.5%, Japan's Nikkei slipped 8.5%, and the Euro Stoxx 50 declined around 4%. South Korea's benchmark dropped roughly five times more severely. What accounts for this disparity?

① Qualitative Differences in Memory Semiconductor Risk Exposure

The semiconductor sector accounts for half of the KOSPI index. Furthermore, compared to Taiwan, where TSMC holds a dominant foundry monopoly, or the United States, which centers on logic chips such as Intel and Qualcomm, South Korean chipmakers like Samsung Electronics and SK Hynix hold an overwhelming proportion in memory and commodity DRAM. Consequently, they are directly exposed to the threat of rapid catch-up by Chinese chipmakers like CXMT.

② Disproportionate Selling by Foreign Passive Funds

Whenever global funds scale back their risk asset portfolios, South Korean stocks bear the brunt first. Because rebalancing is straightforward and trading liquidity is abundant, aggressive selling is executed heavily across both spot and futures markets. In the first half of this month alone, net selling by foreign investors exceeded 18 trillion won. In contrast, the buying capacity of domestic institutional and retail investors to absorb this volume has been exhausted. As a result, price support lines collapsed helplessly.

③ Surging Exchange Rates and a Vicious Cycle of Margin Calls

The rising won-dollar exchange rate further incentivized foreign investors to sell to avert currency losses. On top of that, forced margin call liquidations from leveraged retail accounts flooded the market amid the steep drop. A technical downward spiral ensued, where declines triggered further declines.
Even so, many analysts point out that there are other reasons why the South Korean stock market has experienced such severe volatility. On October 8, Samsung Electronics announced stellar earnings, surpassing 100 trillion won in quarterly operating profit for the first time in history. Yet since the beginning of this month, Samsung Electronics' share price has dropped more than 21%. SK Hynix, which posted an astonishing operating margin of 76%, saw its shares plunge nearly 29% over the same period. Critics argue this stems not merely from earnings outlooks or corporate valuations, but from a revival of chronic distrust in South Korean stocks—the Korea Discount. SK Hynix's push to list its subsidiary Solidigm serves as a prime example, reviving the deep-seated trauma of South Korean-style duplicate listings, often termed carve-out or split-off IPOs.

① Concerns Over Entrenching Multi-Tiered Duplicate Listings

One of the unique structural afflictions of the South Korean market is the pyramidal governance structure connecting the holding company (SK Inc.), the intermediate holding company (SK Square), and the operating company (SK Hynix). Critics point out that separately listing Solidigm, a core subsidiary, would effectively create a four- to five-tier duplicate listing structure. Analysts warn that this could pile an extreme "holding company discount" onto the equity values of the parent company and upper-tier holding firms.

② Carve-Out of Core Growth Drivers and Equity Dilution

Solidigm initially posted substantial operating losses. However, fueled by surging demand for high-capacity enterprise solid-state drives (eSSDs) for AI data centers, it has recently emerged as a lucrative core asset for SK Hynix. Investors cannot help but feel betrayed, arguing that parent company shareholders bore the financial burden throughout the loss-making phase, only to have the rewards carved out via an external listing just as the company entered a period of massive profit recovery.

③ Conflicts of Interest Between Parent and Subsidiary

If listed on the U.S. Nasdaq, Solidigm's board of directors would be legally bound under U.S. law to prioritize the interests of Solidigm shareholders. Structural conflicts of interest would inevitably arise when negotiating wafer supply pricing, patent royalties, and next-generation technology licensing with the parent company. Critics argue this will become a factor undermining the shareholder value of the parent, SK Hynix. In response, SK Hynix maintains that "Solidigm is an independent overseas corporation acquired and cultivated from Intel's NAND division in 2020, rather than a physical spin-off of a domestic business division." It emphasizes that "this is a rational business decision aimed at raising massive AI investment capital in local U.S. markets without burdening domestic shareholders through rights offerings or taking on additional debt." However, SK Hynix shareholders have reacted with indignation, voicing criticism that this is "a classic chaebol-style financial maneuver in which controlling shareholders with low equity stakes dilute the economic interests of minority shareholders to attract outside capital while maintaining control over the parent company."
The current administration has pursued resolving the Korea Discount and promoting the Corporate Value-up Program as signature policy priorities. These initiatives served as one of the primary drivers behind the KOSPI's vertical ascent during the first half of this year, sparking expectations that the Korea Discount might transform into a "Korea Premium." Recently, however, overseas institutional investors have turned cold and skeptical. They assess that the government's reform measures and trajectory lack efficacy due to the absence of binding mandates or penalties, centering instead on voluntary disclosures of Value-up guidelines and tax incentives. In particular, while regulations on duplicate listings require board resolutions and public disclosures detailing measures to protect parent company public shareholders, shareholder consent remains merely a recommendation when dealing with acquired subsidiaries rather than physical spin-offs, or in the case of overseas listings. This leaves a significant loophole in the regulatory framework. Consequently, perception is growing that this amounts to "voluntary regulation devoid of substance." As South Korean government policy remains confined to recommendations and voluntary compliance, market participants have begun questioning the authenticity of institutional improvements, citing recurring old habits such as distorted merger ratios among affiliates and controversial carve-out listings.

Net selling by foreign investors reaching trillions to tens of trillions of won is not driven merely by concerns over an economic slowdown. To a large extent, foreign active funds that entered temporarily on policy momentum are withdrawing capital after concluding that South Korean conglomerates have not changed their ingrained tendency to neglect minority shareholders. In bull markets or liquidity-driven rallies, corporate governance flaws and duplicate listing risks were overshadowed by steep earnings growth. Confronted with a triple burden of a global economic slowdown, an AI bubble debate, and intensifying semiconductor competition, however, investors are fleeing first from a market that fails to protect shareholders in times of crisis while looking out solely for the interests of controlling shareholder families. The controversy surrounding Solidigm's listing and the steep plunge in domestic stocks, led by SK Hynix, stand as clear proof.
※ Please note: This article was translated by AI and may contain errors.