[What Do You Think?] Allowing Short Selling or Prohibiting Margin Buying

[濁流淸論(Takryu Cheongron)] "Credit Buying and Stock Short Selling Are Based on the Same Principle... One Side Should Not Be Banned Alone"

Takryucheongron is a column featuring in-depth analysis and diagnosis by experts in the relevant fields on socially contentious topics. This week's topic is stock short selling, which is drawing both support and opposition ahead of its resumption in March.

Professor Ki-beom Bin, Department of Economics, Myongji University

Bin Gi-beom, Professor of Economics, Myongji University

The debate over stock short selling is once again in full swing in the stock market. The issue is dominating media coverage. Some individual investors are strongly calling for an extension of the ban on short selling or a complete abolition of it. Others argue that short selling should be allowed for individuals. The political sphere is also responding to this. The financial authorities seem yet to clearly finalize their stance or policy on short selling regulations.

Amid the unprecedented crisis caused by the infectious disease COVID-19, South Korea faces a mountain of serious economic problems. These include conflicts between quarantine measures and the economy, protecting economically and socially vulnerable groups during the crisis, enhancing the effectiveness of disaster relief funds, increases in government and household debt, instability and price rises in the housing market, worsening wealth and income inequality, and asset price surges due to expansionary monetary and fiscal policies. In the long term, challenges such as a declining working-age population, depletion of public pensions, discovering future growth engines for the Fourth Industrial Revolution, preparing for Korean Peninsula unification and its funding, environmental protection and the economy, and securing energy resources are so numerous they are difficult to list. Each issue is a problem more complex than the Hilbert problems in mathematics. Faced with these critical national economic issues, stock short selling is practically nothing. It is not the time for our government, political circles, or society to waste effort and opportunity arguing over stock short selling. It is truly regrettable that the debate over stock short selling has been repeating in place for over a decade.

Stock short selling is the act of borrowing stocks to sell them. Since the stocks are borrowed, until they are returned, the borrower may sell them, lend them to others again, or simply hold them?it's up to the borrower. People borrow money, cars, and houses, so there is no reason stocks cannot be borrowed. If money is borrowed, it can be used to buy something to consume, lend to others, buy a house or stocks?whatever?as long as it is repaid on time. Similarly, if borrowed stocks are repaid on time, no one should care what is done with them before maturity, including selling them.

Stock short selling can be broken down into two stages: borrowing the stocks and selling the borrowed stocks. Neither the first stage of borrowing stocks nor the second stage of selling the borrowed stocks is strange or unusual in a capitalist market economy or by global standards; they are natural transactions in any human society. Both stages are neither strange nor bizarre. If you want to sell a stock but do not have it, you borrow it to sell. The same applies to money. If you want to sell money (i.e., buy something with money) but do not have it, you borrow money to buy what you want (i.e., sell the borrowed money).

The term "stock short selling" carries a negative image. In essence, it is "stock borrowing sale" or "stock credit sale." Stock short selling and buying stocks on credit (credit purchase) are essentially the same except for direction. If stock short selling is fraudulent, then credit purchase is also fraudulent. Stock short selling is borrowing stocks and selling the borrowed stocks to get money, while credit purchase is borrowing money and selling the borrowed money to buy stocks. These two are completely symmetrical, like two sides of the same coin. The current Korean stock market, where credit purchases are allowed but stock short selling is blocked, is rather strange and bizarre. If credit purchases are not prohibited, stock short selling should not be prohibited either. If stock short selling is to continue being banned, credit purchases must be equally restricted with the same intensity.