The Democratic Party, Extension of Short Selling Ban 'Likely'... "Concerns Over Foreign Capital Outflow"

Passport "Extension of Short Selling Ban Followed by System Improvement" Direction
KOSPI Stabilizes at 3000, Timely Resumption of Short Selling

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] The ban on short selling, scheduled to end this March, is highly likely to be extended. This is due to concerns from the ruling party about negative public opinion on short selling by 'Donghak Ants' (individual investors) ahead of some local government by-elections in April.

On the 23rd, according to the Democratic Party of Korea and financial authorities, the ruling party and government are considering extending the short selling ban for 3 to 6 months and preparing improvement measures to minimize side effects upon resumption. The improvement plan being discussed involves allowing short selling only on a limited number of top stocks based on market capitalization and trading volume.

Prime Minister Chung Sye-kyun recently emphasized the extension of the short selling ban during a radio broadcast, stating, "It is not desirable to resume short selling without institutional improvements." Yang Hyang-ja, a Supreme Council member of the Democratic Party, recently called Donghak Ants 'patriots' on the radio and said, "We have an obligation to create conditions for them to invest actively." Members of the same party, including Song Young-gil, Park Yong-jin, and Shin Young-dae, have also publicly opposed the resumption of short selling.

Candidates who have declared their intention to run in the by-elections are also opposing the resumption of short selling. Woo Sang-ho, running for Seoul mayor, argued for extending the short selling ban, saying, "The issue of the 'tilted playing field' between ant investors and institutional investors has not been resolved." Ahn Cheol-soo, the People's Party candidate for Seoul mayor, strongly criticized short selling, saying, "Short selling in the domestic stock market allows only institutions and foreigners to profit while individuals suffer losses," and called the resumption of short selling "a poison to the capital market."

[Image source=Yonhap News]

As voices demanding an extension of the short selling ban grow, especially in political circles, the Financial Services Commission (FSC), which had officially planned to resume short selling in March, appears to be stepping back. On the 18th, Eun Sung-soo, chairman of the FSC, said, "The decision on whether to resume short selling is expected to be made in February, but it has not been finalized yet," showing a reserved stance.

Short selling is a transaction where stocks are borrowed and sold when a price decline is expected. Investors borrow stocks of companies expected to fall in price, sell them, and if the price drops later, buy them back at a lower price to return the borrowed stocks and earn a profit. While short selling serves a positive function by preventing bubbles caused by overvaluation and helping stock prices reflect their true value, it has been criticized for being abused by institutions and foreigners as a tool for market manipulation.

In March last year, the FSC imposed a six-month ban on short selling as the stock market plunged due to the impact of the novel coronavirus (COVID-19). The ban was then extended for another six months and was scheduled to be lifted on March 16 this year.

Within the securities industry, there is a growing sentiment that short selling should be resumed, as the market has continued to rise following last year's 'debt investment' (borrowing to invest) craze, and recent KOSPI levels have maintained above 3,000, reducing concerns about price declines. There are also worries that prolonged short selling bans could lead to foreign capital outflows from the Korean stock market. Foreign investment accounts for about 850 trillion won, roughly 35% of the total market capitalization. A securities industry official said, "Just as investors avoid the Chinese market, markets with high uncertainty influenced by government preferences do not attract foreign investment," and warned, "If foreign investment funds withdraw, the shock to the domestic stock market will be greater."