S.Korea prepares to launch $7.6 bn stock market stabilization fund

South Korea last week completed the process needed to launch a stock market stabilization fund of 10.76 trillion won ($7.6 billion). The timing for capital injection is being discussed as the main bourse Kospi has rebounded.

A resolution on the fund was made last week by 23 financial groups and financial services firms, including banks, insurers and brokerages. The fund consists of a 10 trillion won commitment from the 23 entities and 760 billion won from the Korea Exchange and three state-run financial services institutes.

The total amount is equivalent to 142% of Kospi’s average daily trading amount in October.

Korea Investment Management Co. will make capital calls, which entails collecting pledged funds from the investors when the need arises, for injection in Kospi 200 exchange-traded funds (ETFs) and index funds.

The fund management committee held its first meeting on Oct. 31, when members discussed when the capital injection should be made.

The committee decided it won't inject capital in the market immediately as the Kospi has bounced back above 2,300. The index fell to around 2,150 when revitalization of the fund was first planned in late September.

“The purpose of the fund is to normalize the market, not to simply boost stock prices,” a committee source said, adding: “We will urgently inject capital if the stock market plunges, but the market is currently not in such condition."

The timing for capital injection hasn't yet been decided as the weighty investment is expected to heavily affect the market, the source said.

The committee has also raised concerns about monetary stringency, saying it should closely monitor the matter as bond market risk may extend to stocks.

Write to Hyeong-Gyo Seo at seogyo@hankyung.com
Jihyun Kim edited this article.