Sung-kuk Hong: "Additional Measures on Leveraged ETFs Are Inevitable" [So Jongsup's Current Affairs Show]

[Interview] Hong Sung-kuk, Chairman of the Democratic Party’s National Economic Advisory Council

“We must prepare for the post-semiconductor era now”

“Education reform is the most critical issue for Korea’s economy”

■ Broadcast: The Asia Business Daily's "So Jongseop's Current Affairs Show" (Monday–Friday, 4–5 p.m.)

■ Host: Jongseop So, Political Specialist ■ Producer: Kyungdo Lee, PD

■ Guest: Sung-kuk Hong, Chair of the Democratic Party's National Economic Advisory Council (July 27)

※ When citing this article, please specify, "So Jongseop's Current Affairs Show."

So Jongseop: Hello everyone. Welcome to "So Jongseop's Current Affairs Show." Our guest is the economic expert of the Democratic Party, Mr. Sung-kuk Hong, who served as CEO of Daewoo Securities and as a member of the 21st National Assembly, now serving as the Chair of the Democratic Party's National Economic Advisory Council. We will listen to his views on pressing economic issues. Thank you for joining us, even with your busy schedule.

Sung-kuk Hong: Hello, thank you.

So Jongseop: You served as a member of the 21st National Assembly representing Sejong City but did not run in the 22nd general election. Considering the current dynamics between the ruling and opposition parties, it seems you made the right choice back then.

Nothing Looks Good for Our Economy Except Semiconductors

Sung-kuk Hong: The most common compliment I hear these days is that it was excellent timing not to run again. The political sphere is now at a point where infighting occurs even within the same party, not just between the parties. Both parties are fighting each other. Personally, I am not someone who can attack others. These disputes are not about policies, but about power struggles, and this is not the time for such infighting.

The U.S. is again raising tariffs, and other than semiconductors, nothing is going well in Korea's economy at the moment. Therefore, we need to focus on finding ways to revive the rest of the industries. Even if I had served another term in the National Assembly, I would have continued to be caught up in power struggles—unable to speak freely. Without an official position, I have become a "one-man think tank," giving lectures to assembly members and sharing my ideas openly and confidently.

SungKuk Hong, Chair of the Democratic Party's National Economic Advisory Council, appeared on So Jongseop's Current Affairs Show on the 27th and is being interviewed at The Asia Business Daily studio in Jung-gu, Seoul. Photo by Younghan Heo

So Jongseop: It sounds like you've found your freedom.

Sung-kuk Hong: Yes, indeed.

So Jongseop: I am curious about your overall assessment of the state of the Korean economy.

Sung-kuk Hong: It has been 64 years since Korea began its economic development—starting in 1962. In the early stages, growth rates were extremely high; we even achieved 15% growth in the 1970s. But since the 1980s, the growth rate has steadily declined, reaching just 1% last year. Then, with this year's semiconductor supercycle, we are currently at 3.5% growth. However, last year, the semiconductor sector performed poorly, so excluding semiconductors, the growth remained in the 1% range. Semiconductor manufacturing, however, does not generate much employment. IT industries, in general, do not create many jobs, and this is particularly true for semiconductors.

Given these factors, the focus on semiconductors overlooks that many citizens are struggling on the lower rungs of the 'K-shaped' recovery. We must address this imbalance quickly, or Korea could face substantial difficulties. Of course, the enormous profits from semiconductors will start flowing in this year, and expectations are very high. For example, it's projected that Samsung and SK Hynix together could bring 600 trillion won this year, 1,000 trillion won next year, and another 1,000 trillion won the year after that—totaling 2,600 trillion won over three years. Korea's annual GDP is about 3,000 trillion won.

Based on such expectations, both the stock market and the government have acted, but some experts express contrasting views. While many acknowledge that the outlook should remain strong through next year, many believe it could turn downward by 2028. If the semiconductor boom wanes, what will happen to Korean society? We need to create a safety net with this semiconductor income. That's how we can achieve balance in society. Such discussions have already begun.

If the Semiconductor Boom Turns, We Need a Safety Net Now

So Jongseop: How should we build this safety net?

Sung-kuk Hong: Back when I wrote a column for a news outlet in late April or early May, the projected figure was 1,500 trillion won. The question is, how should we use this money? I was among the first to raise this debate. This money must be invested for the future, not spent. To put it simply, we need to inject these funds as a one-time solution to reinforce Korea's economic resilience.

So Jongseop: It sounds like we shouldn't get drunk on semiconductor optimism.

Sung-kuk Hong: The advance of AI is unstoppable, and semiconductor demand will continue to rise, but China's Changxin Memory just went public today. The first major point is that new competitors from China are emerging. Secondly, companies investing in data centers often lack sufficient funds, so they issue corporate bonds or take out private loans. Oracle, for example, is currently borrowing money at the proper rate plus a 2% CDS premium.

Google, a massive company, just announced strong Q2 earnings last week. Things are moving forward, but given today's rapid pace, some market forecasts may require adjustment. OpenAI, for example, is struggling to make profits, so the market questions how much more investment can flow in. These days, Nvidia is lending money to OpenAI to buy their semiconductors, or setting up lease agreements—so after a few months, we may see a slowdown. The market senses this, leading to semiconductor stock prices falling sharply.

Third, we've announced plans to invest 4,755 trillion won building fabs in the Honam region, but we also need to invest in the United States, don't we? Although there is currently an undersupply, if Samsung Electronics and SK Hynix increase output through competition, supply will inevitably loosen. The issue isn't that the AI or semiconductor boom is ending; it's simply that while volume remains strong, unit prices have surged, and these prices could fall. If that happens, our sky-high optimism may face disappointment. I hope people can temper their excitement a bit. Even if the projected three-year total is "only" 2,000 trillion won instead of the highest forecast of 2,600 trillion won—it would still be huge.

So Jongseop: That is still tremendous.

Sung-kuk Hong: I just don't believe excessive optimism is healthy.

We Must Guard Against Semiconductor Over-Optimism and Boldly Invest in Future Technologies

So Jongseop: So excessive optimism must be curbed. In order to spread the massive profits from semiconductors across industries and truly innovate Korea’s industrial structure, what must be done?

Sung-kuk Hong: I’d like to give a word of advice to the top executives at SK and Samsung, especially about their suppliers—their first- and second-tier vendors. It looks like they’re still barely sharing profits with their partners. Considering their financial results, it’s time for some of this wealth to ‘trickle down’, especially since those partner companies worked so hard along the way. Samsung and SK Hynix could not have succeeded alone.

Secondly, there must be investment in future technologies. Now we are transitioning to physical AI. Korea is well positioned for this because we have the world’s most diverse advanced manufacturing sector. There are few countries globally where AI can be deployed in so many industries. Our manufacturing portfolio is so broad; even a ramen production line can incorporate AI. Therefore, the government needs to invest boldly in this “physical AI” transition.

Sungguk Hong, Chairman of the Democratic Party's National Economic Advisory Council, appeared on So Jongsup's Current Affairs Show on the 27th for an interview. Photo by Yeonghan Heo

So Jongseop: Even amidst the semiconductor boom, some warn that other sectors, especially manufacturing, are facing crises. There are also concerns about high oil prices and foreign exchange rates.

Sung-kuk Hong: This year, and especially lately, we are seeing a flood of Chinese electric car advertising. Their value for money is excellent. While Korean automakers have performed well so far, our auto exports are in decline. The impact of the auto industry on our economy is even greater than that of semiconductors. Over 2 million people are directly employed, and it affects every industry, including steel, chemicals, and IT. The government needs to intervene and offer bold support, along with imposing necessary regulations. Ultimately, the manufacturing contest is between China and South Korea. The most important thing now is for Korea to elevate what it does best to a global standard.

So Jongseop: Do you believe current government economic policies are on the right track, or do you feel they are lacking in key areas?

Sung-kuk Hong: What is unique is that it’s only been a year and two months since the President’s inauguration, but the situation has changed dramatically in that time. In the second half of last year, as semiconductors and AI boomed, the government—perhaps understandably—lost some objectivity. But the fact is, outside of IT manufacturing, other areas are getting far less policy attention. This needs to be corrected. Regional balanced growth is also tied to non-IT manufacturing, since most production facilities are located in the provinces. That means policies must focus more on these regions, assisting companies in adopting physical AI—through funding, technical support, and training. Education is lagging too. Spain moved quickly; its government provided AI support to around 50,000 SMEs, and now every country is racing to catch up. Even countries with fiscal problems are taking on debt, believing that failure to invest now means disaster. People are stepping up with a sense of urgency.

So Jongseop: So, in that regard, you believe Korea is lacking?

Compared to Other Countries, Our Society Is Not Sensitive Enough to Crisis

Sung-kuk Hong: Yes, and this is not just a government issue, but reflects a broader social mentality—there is still a lack of urgency in Korea. For example, among G7 countries, Germany has the strongest fiscal position. They strictly observed fiscal rules, but abandoned them recently. Why? Because they realized their survival is at stake if they don’t invest now. Germany excels at making cars, and could once live comfortably selling only within Europe—but as Chinese products flood the market, people seriously worry about losing what market share remains if China takes over Europe.

The capitalism of today is no longer market-driven, but state-led. Nations are now at the center, steering their capitalist models. In the U.S., President Trump took the lead in this approach, openly criticizing anyone not investing—including the Secretary of Commerce. Investment leadership and visionary leadership for the future are more decisive than ever—almost to a messianic degree—and the trend will only intensify.

So Jongseop: In such turbulent times, what do you see as the key to a great transformation of Korea’s economy?

Hong Sung-kook, Chairman of the Democratic Party's National Economic Advisory Council, emphasized the importance of educational reform regarding the Korean economy. Photo by Heo Younghan

Sung-kuk Hong: Venture capital firms say there are no companies worth investing in right now. There is plenty of money, but no candidates. So what must we do for the Korean economy? For me, the answer is education reform. We need to help young people who can’t find jobs to start their own businesses. The current education system is simply inadequate for what the future requires. In this sense, I believe education reform is the single most important policy for Korea’s economy. Everything else can follow. Educational reform is essential for new technology development—without it, simply building more factories is pointless. There is almost no debate these days about what we should teach. Years ago, we discussed university curricula and entrance exams, but these issues rarely enter public discussion now.

Education Reform Is the Most Important Issue for the Korean Economy

So Jongseop: As a society, we've become more preoccupied with making money and living comfortably, but debates about what kind of life we should live and how to plan our future have diminished sharply compared to the past.

Sung-kuk Hong: Reports say Korea will welcome 23 million foreign tourists this year. Domestic consumption remains weak, and there are few opportunities for young people. But we could simply attract more foreign visitors—by building more hotels downtown, improving transportation, and so on. With just a bit of creative thinking, we could create more jobs. Ultimately, the bigger picture is education.

So Jongseop: There’s a lot of controversy over single-stock leveraged ETFs. Policy chief Yongbeom Kim has moved to require cash holdings of 30 million won for investors starting July 31, and the expectation seems to be this will have positive effects. What is your view?

Sung-kuk Hong: I don’t think it will be easy. The difficulty is that investment timeframes have shortened significantly, and most long-term investors have disappeared. It is not the single-stock leveraged ETF itself that caused stock prices to fall, but rather the influx of short-term investors during a market downturn that triggered this trend. When the market rises, such products tend to amplify gains, but when markets decline, they accelerate and exaggerate losses.

It is unfortunate because the single-stock leveraged ETF is not unique to Korea—other countries have them as well. However, in the case of, say, Nvidia, the weight in the total market cap is only about 3%. A 3% product will have no real impact on the market as a whole. In Korea, however, Samsung Electronics, SK Hynix, and related companies like SK Square together make up over 55%. Because leverage was set at 2x, the product is unique in the global market. TSMC exists, but there are no such products in Taiwan. If you think about it, this ETF was poorly designed from the start. Many solutions are being considered, and if the new regulation doesn't work, there are plenty of additional policy tools available.

Hong Sung-kuk, the chairman, said that additional measures for single-stock leveraged ETFs are inevitable. Photo by Hyunghan Hur

The Single-Stock Leveraged ETF Was Poorly Designed—Current Measures Are Too Weak

So Jongseop: Is delisting the ETF an option?

Sung-kuk Hong: That would have to wait until more time passes. Many people purchased at high prices—immediate delisting would lock in their losses and trigger public uproar. For now, the main problem is that trading volumes are excessive: over 10 trillion won daily, whereas KOSDAQ trades only five trillion won a day. Various methods are being considered to reduce volume, and if side effects worsen, even stricter measures may follow. For now, I think the current measures are too mild.

So Jongseop: So you believe additional steps are inevitable.

Sung-kuk Hong: That’s right. For example, outright bans on same-day trading could be implemented, or the leverage ratio could be cut gradually—say to 1.9x after one month, then 1.8x, then 1.7x, until it reaches 1.5x. The situation is very serious and the government is clearly aware. Given how far things have already gone, stronger measures will be rolled out step by step, and I'm actively pushing for this as well. This is not an ordinary stock, but essentially a futures product. It became far too easy to speculate on derivatives. I thought even at the outset that it was the wrong time for such a product, but didn't see the severity. The main stocks—Samsung Electronics and SK Hynix—fell because expectations had become so high, and while a correction was expected, the single-stock leveraged ETF amplified the decline through market disruption.

So Jongseop: There’s talk that the venture ecosystem is effectively dying.

The Venture Ecosystem Is Collapsing—Should Only Samsung and Hynix Survive?

Sung-kuk Hong: The way it works is that venture capitalists invest in SMEs, help them list on the market, sell their shares and use the returns for new investments. When they can't exit, none of this works. Hence, most small- and mid-cap stocks have fallen by half or more, and large caps aren't immune either. If this continues, it's a major problem. Retail investors who used to hold Samsung Electronics and SK Hynix are now leaving the market. As of the end of July alone, more than 8 trillion won reportedly flowed overseas—the volatility in Korea is so great, investors are shifting to U.S. markets. This means SMEs and smaller ventures are even more left behind, resulting in the near-death of the venture ecosystem.

When an ecosystem fails, it can collapse in an instant, but recovery takes a very long time. So what must be done? Above all, single-stock leveraged ETF trading volumes must be reduced. Financial institutions, after all, have made large gains from these products. The situation is so severe that even products like KOSDAQ active ETFs might be necessary. The reality—though not widely recognized yet—is that the venture ecosystem will completely collapse if things continue along this path. The Venture Capital Association and other groups are considering measures, but there is little they can actually do. Are we going to let Samsung and SK Hynix be the only survivors, and let the rest perish? It’s time for serious reflection.

So Jongseop: Real estate policies seem to be moving toward higher holding taxes and tighter loan regulations. What’s your assessment?

Real Estate Is a Metropolitan Issue; Only a Comprehensive Solution Can Address It

Sung-kuk Hong: Real estate policy has never worked in Korea. No one has found the perfect solution. The real problem centers on the metropolitan area, and even within that, Seoul is in a league of its own. The provinces are like another country entirely—policies there should focus on support, while in the metropolitan area, it’s a question of taxation. This makes it very difficult to apply uniform measures.

Secondly, if the projected 2,600 trillion won from Samsung Electronics and SK Hynix enters Korea over three years, that creates a monumental influx of liquidity from abroad. That money must be invested somewhere. For the next two to three years, managing this liquidity will be a major challenge. Still, from a macroeconomic standpoint, it will be difficult for real estate prices to rise under current interest rate conditions.

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Two months ago, statistics showed that birth rates were much higher among those living in public rental housing. Surveys found that these people also reported the highest happiness index. In fact, such households had higher birth rates than homeowners, who tend to be more burdened by interest payments. I see this as a clue: even if it requires a major special law, we should dramatically increase the supply of public rent housing. For example, in the metropolitan area—my own neighborhood in Banghak-dong, Dobong-gu, a 30-pyeong apartment is worth over 600 million won, though I don’t even check market prices because I’ve lived there forever. There is severe differentiation, even within the metropolitan region.

National balanced development—including the relocation of the Blue House and National Assembly to Sejong City—should be pushed through rapidly. That would change public sentiment. Also, the cut-off for admission to regional national universities is well below that for Seoul’s lower-ranked universities. We should simply invest more and raise the status of these regional universities. It has to be a comprehensive approach. Winning hearts and minds is key. There’s little difference between selling regional real estate to buy in Seoul and selling small/mid-cap stocks to buy Samsung or SK Hynix. How can you stop that? The key is to make it worthwhile to hold on to regional assets. Rather than focusing solely on metropolitan holding taxes and super-high-priced housing criteria, policies geared toward balanced development—in various complex and integrated ways—are necessary. The real estate problem won’t be solved without addressing the issue of balanced national development. Troubles will reappear as more liquidity keeps pouring in—as previously discussed. It’s a persistent risk.

So Jongseop: That’s all for today. Thank you for your valuable insights.

Sung-kuk Hong: Thank you.

This content was produced with the assistance of AI translation services.