Seoul stock slump: KOSPI down 5.46%, SK hynix down 10% on Chinese competition

The KOSPI, the main index of the Seoul stock exchange, ended Tuesday's session at 6,035.35 points, 5.46% lower than the day before, and during the session it even fell below 6,000. Memory chip makers were hit hardest: SK hynix shares fell 10.09% and Samsung Electronics 7.39%. Investors were spooked by the plans of China's CXMT, which wants to compete with the Korean firms in the market for server chips.

How the session unfolded

The index opened 3.10% lower at 6,186.08 points. At 9:47 Korean time, with KOSPI 200 futures down 5.08%, the exchange triggered a so-called sell sidecar. This mechanism briefly halts sell orders placed through program trading in order to slow a sharp fall. It is not, however, a full suspension of trading, known as a circuit breaker. Sources differ on this point: Poland's DM BOŚ wrote in its morning bulletin that the index fell more than 7% at the open and hit a circuit breaker, while Korean media report a 3.1% drop at the open and a sidecar. The date of the previous sidecar is also given differently, as either 19 or 20 August.

A Chinese competitor

The direct cause of the sell-off is the plan by CXMT, China's largest maker of DRAM memory. The company wants to launch server DDR5 chips with a more compact design by the end of the year. DRAM is the working memory used in computers and servers, among other devices, and DDR5 is its current generation. Samsung and SK hynix are among the global leaders in this segment, so the arrival of a strong Chinese rival could mean pressure on prices and margins. This is not the first time CXMT has shaken the Seoul market: its stock market debut in July set off two KOSPI circuit breakers, full trading halts, on 28 and 29 July.

Foreign money flows out

Foreign investors were net sellers of KRW 2.2 trillion of shares on Tuesday. Since the start of October the total is about KRW 8 trillion, and since the start of the year KRW 199 trillion. "The outflows are too large to be attributed solely to portfolio rebalancing after the rally," says Heo Jae-hwan of Eugene Investment. His words suggest that the sell-off is driven by more than profit-taking after earlier gains.

Falls in the US and Japan too

Sentiment towards the chip sector had already soured on Monday in the US. The Philadelphia semiconductor index fell 2.67%, shares in the US memory maker Micron 3.9% and Nvidia 1.3%. Japan's Nikkei lost 2.14%, according to DM BOŚ.

What it means for investors

Tuesday's session shows how heavily the Korean market depends on two memory makers. Samsung and SK hynix are the largest companies on the KOSPI, so their losses drag down the whole index. For investors, including those who hold emerging-market or technology funds, the key question is whether the outflow of foreign capital continues and whether the sell-off spreads to other markets. This article is for information only and is not an investment recommendation.