KOSPI 5000, Again; President’s Private Mortgage
The scorching heat in Seoul continues even as the sun reaches “start of autumn立秋” — but tending my garden yesterday, I could feel the evening cooling down, unlike the day before.
I’m trying to rev up the frequency of this newsletter. From Tuesday after next, I’ll be sending Weekly Kontexts with (relatively) more timely comments in a shorter cadence. As always, let me know what you think via subin at koreakontext dot com!
—Subin
Why it matters: President Lee’s economic record rests on an AI windfall he did not create and then amplified at retail investors’ expense. His hypocritical apartment sale has put his political legitimacy in play, while his housing policy looks set to repeat the failures of Minjoo presidents before him.
KOSPI 5000, again
President Lee likes to portray himself as an overachiever. His actual record since his years as mayor of Seongnam is mixed, but lately he has pulled off something extraordinary: fulfilling the same election pledge twice.
On the campaign trail, Mr Lee promised to usher in a new era of KOSPI 5,000 through comprehensive market and corporate governance reforms. The benchmark index, long capped by the so-called “Korean discount,” duly rose above 5,000 in February.
It didn’t stop there. As the index shot through 9,000, the Korean market became the world’s best performer. Social media was awash with memes of crypto bros ditching their darlings for Korean stocks.
The catch was that the outperformance had little to do with the reforms and everything to do with the global AI spending spree. The two semiconductor giants that control the memory chip bottleneck — Samsung and SK Hynix — accounted for essentially all of it. The ruling Minjoo party stopped short of meaningful reform: it had a far bigger priority — dismantling the country’s criminal justice system.
As anxieties over AI overspending clouded the market, the index nosedived. Six months after that first crossing, the KOSPI was back in its 5,000 era — a double for Mr Lee.
A government cannot control external factors such as the surge in global AI capex, but it can try to minimize the swings that follow the whims of the market. The Lee administration did the opposite: it fast-tracked the launch of single-stock leveraged ETFs to boost retail participation.
The market reciprocated with unprecedented volatility. Nearly half of all the circuit breakers in the history of Korean stock trading have been triggered this year alone. Retail investors are estimated to have lost more than $38 billion on leveraged ETFs.
Thank god there’s no election until 2028.
The Chief Hype Officer
Kim Yong-beom, the president’s policy chief, was the man of the match here. He boasted that it was he who pushed the financial regulators, who had never permitted single-stock leveraged ETFs, into approving them. Whether it crossed the seasoned technocrat’s mind what leveraged bets on the largest-cap stocks — which account for half the market’s total capitalization — would do to that market is beyond me.
In the sugar rush of the boom, Mr Kim gave himself a new hat, the Blue House’s chief hype officer, and began posting long-winded ramblings on social media — often suspected of being AI-generated — about how the AI boom will revolutionize the Korean economy and the state’s role in it once and for all. His words reverberated across the administration and laid the groundwork for its $1 trillion pork-barrel projects.
Nationwide grievance prompted even ruling party politicians to demand Mr Kim’s ouster. But a seasoned technocrat who can package Mr Lee’s populist ideas — basic income among them — in glib econ-speak is precious talent for a president whose other “policy brains” run largely to fringe figures with notions like the hotel economy.
With most of the gains from peak AI fervor already evaporated, the wildest volatility in the history of the Korean market, still ongoing, will come at the expense of what retail investors have left. Skepticism over the AI spending spree now hangs over the global market. South Korea will retain an edge in a limited array of memory chips for the time being, but what other layer of the AI stack does it hold? It still struggles to expand its power grid, which will drag on its compute buildout; its national champions have made little progress on models and applications. The only other thing with an edge on the global stage is Mr Kim’s hype — on par with Sam Altman’s and Dario Amodei’s. (A pity Mr Kim has no model of his own to bring to the recent freak-out party.)
The President’s Private Mortgage
The damage from the market’s volatility is already denting Mr Lee’s approval ratings, but the heaviest blow will come from his recent apartment deal.
The president and the first lady’s unusual private mortgage to their buyer goes against what his administration’s housing policy stands for.
Mortgage control by financial repression has been the government’s favorite instrument against housing price hikes since President Moon Jae-in. It is quick, unlike building more houses, and it does not burden existing homeowners, unlike raising taxes.
It leaves behind, however, the younger and poorer buyers who most need financial support such as a mortgage, while the rich and well-connected acquire homes with ease.
As mortgage control fails to rein in housing prices, the Lee administration is raising property taxes, especially in the highest price band. It believes it can control prices with precision tax strikes, but the Moon administration already showed that the tax is always shifted to tenants in the end.
Financial arrangements between private individuals, including private mortgages such as the president’s own, are not new in this game, but there is a reason they are rare. Every financial arrangement carries risk, and those struck between private individuals, with no institution to hedge them, carry the most. Going to court is a costly remedy. With the buyer appearing to have put down less than 20% for the apartment, the deal would not have been struck had the seller been anyone other than the president — who would dare to mess with the president?
Housing policy failure has a particular history in Minjoo administrations. The situation looks grimmer for the Lee administration, because this time the president is personally involved.
We don’t have to go all the way back to ancient Greek ethics to see how important it is to have your actions in harmony with your words — especially for a politician. The Korean electorate takes this seriously. Within a few years, a run of hypocrisy revelations reduced Cho Kuk from Mr Moon’s chosen successor-in-waiting to a political has-been with no brighter future in sight.
In Korean politics, the president is like an elected monarch: not only in their authority and power but also in how people see them. They are government incarnate. People like to think of government as a person they can talk to and feel affection for, not as an abstract network of institutions. People can love or hate their president, but once they begin to doubt his legitimacy, everything begins to fall apart.
He could have sold the apartment at a discount — say, 300 million won off — and found a buyer with ample liquidity. Why he did not is a mystery: isn’t a president’s political legitimacy worth much more than a couple hundred million won?
The Curse and the Contest
President Lee has an image as a capable public executive, and even his detractors tend to believe it. Many swing voters who voted for Mr Lee expected him to lead the country into a more prosperous future.
In this regard, Mr Lee resembles President Lee Myung-bak, elected in 2007: no one believed he was innocent; they simply believed a successful businessman would run the country better than a former unification minister who had nothing to offer but corruption allegations against Lee Myung-bak. (Fun fact: that former unification minister is the current unification minister.)
Just as the AI boom was not of Mr Lee’s making, the KOSPI’s nosedive is not largely his doing: as ever, the Korean economy is a sailboat drifting on the winds of global capital. He was, however, carried away by the boom, and made a critical mistake that aggravated the volatility — one he cannot disown now.
Housing has always been the Minjoo administrations’ weakest point. Presidents Roh Moo-hyun and Moon Jae-in both failed to hand power to their party’s next candidate because they could not quell price hikes. I once expected Mr Lee might break the curse — he knows why they failed — but the curse looks like winning again. (Korea’s peculiar housing market and Minjoo’s recurring policy failure are worth a deep dive.)
A one-two punch on the economic front, plus his hypocritical apartment deal, leaves Mr Lee’s footing more precarious. The more immediate question is whether he can keep hold of his party. Minjoo’s leadership contest has yet to conclude, and the early signs are not good for him.