"Stock Market Bubble Growing and Motives Political: Foreign Media Criticize Short Selling Ban"

"Bubble Formation in Ants' Preferred Stocks"
Possibility of 'Political Motives' Also Pointed Out

U.S. financial media Bloomberg News reported a critical view on South Korea's financial authorities' short-selling ban. It pointed out that this could become an obstacle for South Korea, an emerging market, to transition into a developed market.

On the 5th (local time), according to Bloomberg, Brian Freitas, an analyst at Smartkarma Holdings, analyzed that "(South Korea's) short-selling ban further jeopardizes the possibility of moving from an emerging market to a developed market."

He explained, "Because the short-selling ban removes the method to curb unreasonable valuations, a large bubble is expected to form in stocks favored by individual investors."

Bloomberg also interpreted that this short-selling ban measure was implemented ahead of the general election in April next year and may have been politically motivated.

According to the media, short-selling accounts for a very small portion of the domestic stock market. The Korean stock market is about $1.7 trillion in size, of which 0.6% of KOSPI and 1.6% of KOSDAQ are short sales.

It may also act as a negative factor for inclusion in the MSCI (Morgan Stanley Capital International) developed market index, an influential index provider. MSCI requires the full resumption of short-selling as a condition for South Korea's inclusion in the developed market index.

Short-selling is an investment method where investors borrow stocks and bet on a declining market; if the stock price actually falls, they buy back the stocks to return to the lender and pocket the remaining profit. Generally, experts believe that short-selling contributes to the realization of corporate value and price stability in the securities market.

In January 2021, the Korea Stock Investment Association (HanTuYeon), a private investor group, operated a bus with phrases such as "Abolish Short Selling" and "Dissolve the Financial Services Commission" attached to it in front of the Government Seoul Office in Gwanghwamun in the afternoon to protest against short selling. [Image source=Yonhap News]

However, claims that short-selling is the cause of domestic stock underperformance continue to arise, mainly among some individual investors. Last month, the Financial Supervisory Service detected illegal naked short-selling worth about 56 billion won by foreign financial firms BNP Paribas and HSBC, which further increased the aversion to short-selling.

Meanwhile, the Financial Services Commission held an emergency financial meeting on the 5th and decided to ban short-selling in the entire domestic stock market, including the KOSPI, KOSDAQ, and KONEX markets, from today (the 6th) until June 30 next year.

This is the fourth time a short-selling ban has been imposed in South Korea. The previous three short-selling bans were all temporary measures due to major crises such as the global financial crisis (2008), the European debt crisis (2011), and the infectious disease outbreak (2020), but this time the ban was imposed despite no major crisis occurring, which is a difference.