The Dilemma of Fully Resuming Short Selling Amid "Ukeu Akjae" Challenges

Short Selling Ban Exceeds Two Years
Full Resumption in First Half Unlikely

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] The Financial Services Commission banned short selling in March 2020 when the COVID-19 pandemic began, and after 1 year and 2 months, on May 3 last year, partially allowed short selling only for large-cap stocks such as KOSPI 200 and KOSDAQ 150. However, short selling has still not been conducted for other stocks for more than two years. During the COVID-19 crash, countries like South Korea, Taiwan, Indonesia, and Malaysia banned short selling, but South Korea remains the only country that has not fully resumed it yet.

Earlier this year, as the government pursued inclusion in the Morgan Stanley Capital International (MSCI) developed markets index, it considered fully resuming short selling within the first half of the year as a prerequisite. At that time, Lee Yoon-soo, Director of the Capital Markets Bureau at the Financial Services Commission, attended a seminar and said, "We are reviewing the timing of (resuming short selling) by comprehensively considering macroeconomic conditions," adding, "As time passes, it will exceed two years since the full ban on short selling, so we are considering normalization preferably within the first half of the year."

However, with the U.S. interest rate hikes gaining momentum from this year and global tightening policies accelerating, coupled with the global economy faltering due to Russia's invasion of Ukraine, full resumption in the first half seems impossible. The KOSPI index, which surged to 3,300 in the first half of last year, plunged from the 3,000 range at the beginning of this year amid inflation debates and concerns over U.S. tightening, recently falling to the 2,600 level. The KOSDAQ index, which opened the 'thousand-point era' last year, also broke below the 900 level. The upcoming U.S. big step (a 50 basis point hike in the base interest rate) this month has further increased market volatility, adding to the burden. A Financial Services Commission official said, "The situation has changed a lot since early this year," and added, "Because of U.S. tightening and the Ukraine war, global financial markets are unstable, so we are considering the timing of fully resuming short selling."

However, the market expects that even if short selling is fully resumed, the impact will not be significant. According to an analysis by Yuanta Securities of short selling transactions since the beginning of this year, the most active short selling occurred from March 7 to 14, when the KOSPI fell to 2,650, marking the year's lowest point. Kim Kwang-hyun, a researcher at Yuanta Securities, said, "Short selling is not done in anticipation of a decline but is strongly used as a hedging tool in response to a decline," adding, "Short selling does not change the direction of the stock market."