Korean Stock Market Lagging Behind US and Japan, Held Back by China

KOSPI and Shanghai Composite Index Fall Over 6% This Year
Concerns Over China's Economic Slowdown and Financial Market Volatility Negatively Impact Domestic Stock Market

While the US and Japanese stock markets continue to break record highs day after day and are thriving, the domestic stock market has been left out of this strong trend and has shown a sluggish performance since the beginning of the year. It is showing a synchronized pattern with the sluggish Chinese stock market, affected by concerns over a Chinese economic recession. Despite the price merit highlighted by the ongoing correction since the beginning of the year, it remains stuck in sluggishness due to being held back by China.

According to the Korea Exchange on the 24th, the KOSPI fell 6.65% from the beginning of this year to the 23rd. During the same period, the Shanghai Composite Index in China dropped 6.46%. In contrast, Japan's Nikkei 225 index rose 9.70%, and the US S&P 500 increased by 2.57%. The S&P 500 index recently set record highs for three consecutive trading days.

The KOSPI is showing a trend more synchronized with the Chinese stock market than with the US or Japanese markets. Lee Kyung-soo, a researcher at Hana Securities, explained, "Statistically, the direction of the KOSPI tends to move in tandem with the US stock market, but since December last year, the correlation with the US market has somewhat weakened, while the correlation with the Chinese stock market has increased, resulting in underperformance compared to global stock markets." Byun Jun-ho, a researcher at IBK Investment & Securities, said, "The domestic stock market is currently highlighting price merit again after a short-term correction at the beginning of the year, but due to concerns about China and secondary batteries, it is unable to ride the US rally."

There are forecasts that concerns about a Chinese economic recession may grow again due to the sluggish Chinese stock market. Researcher Byun analyzed, "As China's growth rate slows down, volatility in the Chinese financial market expands, which may limit the rebound in growth rate or increase downward pressure again. Since the Chinese stock market has a leading aspect regarding the economy, the recent decline in the Chinese stock market is highly likely to worsen economic sentiment and lead to poor economic indicators." He added, "Due to the limited effect of Chinese policies and the absence of additional policy momentum, it is highly likely that short-term sluggishness will be seen mainly in leading and sentiment indicators of the Chinese economy." Despite the stimulus policies over the past two years, there has been no sign of improvement in the real estate market, which is considered the core of the Chinese economy. China implemented four interest rate cuts from 2022 to 2023, but the effects of increased liquidity and improvements in real estate-related indicators were limited.

Concerns about a Chinese economic recession could negatively impact the recovery of domestic exports. Researcher Byun said, "If the cyclical rebound in the Chinese economy is limited and downward pressure continues, the effect of China's export recovery for South Korea is also likely to be only a brief recovery. South Korea's exports to China have sustained negative growth compared to the previous year for a long time but are expected to turn positive in January this year. However, the strength of export recovery may be weakened by continued economic sluggishness due to disappointment in Chinese policies, potentially accelerating the risk of a peak-out (passing the high point) that could occur in the second half of this year."

In this situation, the Chinese government is reportedly preparing to introduce stock market stimulus measures, drawing attention to the future impact on stock prices. On the 23rd, Bloomberg reported that the Chinese government plans to inject a stock market stabilization fund (Zheng An Fund) worth 2 trillion yuan (approximately 371 trillion won) into the Hong Kong stock market. The Hong Kong H-Share Index, which fell more than 2% intraday on the 22nd and broke below the 5,000 level, rose sharply for two consecutive days following the news of the Chinese government's stock market stimulus, recovering to the 5,200 level. The Shanghai Composite Index also rose for two consecutive days, recovering to the 2,800 level. The KOSPI rose on the 23rd when news of China's stock market stimulus was announced but returned to a downward trend the next day. Park Soo-hyun, a researcher at KB Securities, said, "China has mobilized the Zheng An Fund nine times since 2008, but except for the cases in 2008 and 2015 where fiscal, monetary, and industrial policies were combined, it did not show meaningful rebounds. Like the two past cases, not only the inflow of the Zheng An Fund but also comprehensive policy combinations, economic indicator recovery, and changes in US policy toward China are necessary."

Since concerns about the Chinese economy remain, it is expected to take time for the domestic stock market to rebound. Labor Gil, a researcher at Shinhan Investment Corp., said, "For the domestic stock market to recover relative returns compared to the US, it needs to aim for earnings improvement and a rebound in the Chinese economy. Since it is difficult to confirm immediately, it will take time." Researcher Byun predicted, "The domestic stock market is likely to maintain a cautious stance ahead of the January US Federal Open Market Committee (FOMC) meeting next week, caught between a favorable US stock market and an unfavorable Chinese stock market."