An electronic board in a trading room at Hana Bank's Seoul headquarters displays the Kospi and Kosdaq indices alongside the won-US dollar exchange rate on Thursday. (Yonhap)

While the country's benchmark Kospi remains volatile, hit by the recent political strife sparked by President Yoon Suk Yeol’s martial law fiasco, a stock stabilization fund worth over 10 trillion won ($7 billion) may come to the rescue.

In response to the turbulence in the local stock market, financial policymakers have vowed to provide unlimited liquidity using public funds.

“A stock market stabilization fund worth 10 trillion won will be prepared, ready to be activated at any time,” Financial Services Commission Chairman Kim Byoung-hwan said at a meeting convened shortly after the brief period of martial law was ended.

Since Kim mentioned the fund, top finance officials have repeatedly cited the possibility of its implementation but have not yet specified a date or exact criteria.

A stabilization fund is deployed when there is panic selling on the stock market to provide liquidity and ease volatility. In Korea, such funds are drawn up through a “discussion” between the government, public institutions and private financial service providers, according to Song Min-kyu, a senior research fellow at the Korea Institute of Finance.

“Because the fund is mostly raised from public money, it's the government that gives the green light for its activation,” Song said.

A stock stabilization fund was last activated here in 2008 during the global financial crisis. A 500 billion won fund was drawn up and 103 billion won was injected. On the day of its implementation, the Kospi rose by 5.8 percent, and within a month it had gained 18.5 percent.

When the Kospi fell sharply in early 2020 due to the COVID-19 pandemic, a 10.7 trillion won fund was raised but not activated. The possibility of another fund was discussed in 2022 when the Kospi plunged due to aggressive monetary tightening around the world but again it was not executed.

If the authorities decide to inject liquidity into the stock market this time, they will likely deploy the 10.7 trillion won fund from 2020.

“The authorities could activate the fund if the Kospi falls to the low 2,300 range,” said Lee Hyo-seob, senior research fellow at the Korea Capital Market Institute.

The Kospi stood at 2,463.13 as of 2 p.m. Thursday. It plummeted to a new 52-week low of 2,360.18 on Monday, reflecting political uncertainty after the president’s impeachment vote was scrapped by the National Assembly. It recovered to the 2,400 range the following day but is still down more than 400 points from this year's high of 2,896.4 set on July 11.

Yet experts remained skeptical about the activation of the fund, stressing it would distort the market's valuation.

“The best-case scenario is for the authorities to continuously mention the possibility of executing the fund, but without actually putting it into effect,” Lee said.

“Executing (the fund) would hurt the market's autonomy. Furthermore, the fund would eventually have to be pulled out, which would also take its toll on the market.”

Lee also suggested the fund is not big enough to have much of an impact on the market.

“A 10 trillion won injection is not much compared to the ability of foreign investors to dump 1-2 trillion won in a single day. The fund would have only a limited ability to defend the Kospi, whose market capitalization is around 2,000 trillion won.”