Even the Philippines Allows It... Foreign Media Criticize Short Selling Ban as "For General Election" Purposes

Bloomberg "Contrary to Efforts to Join Developed Country Index"

As the government has imposed a complete ban on short selling for all stocks listed on the domestic stock market from the 6th until June next year, foreign media have raised concerns about regulatory uncertainty in the Korean government. They pointed out that the short selling ban, issued ahead of the 'general election,' could "hinder the possibility of the Korean stock market moving from an emerging market to a developed market." In particular, they questioned whether this measure could actually stimulate the stock market.

Bloomberg News reported on the 5th (local time) that short selling is a "widely used trading method (in global markets)" and warned that "this measure will reverse the Korean government's efforts to upgrade (the Korean stock market) to a major global index."

Short selling is an investment method where investors borrow stocks expected to decline in price and sell them, then buy them back at a lower price later to repay the loan and earn a profit. In a situation where individual investors' participation is limited, foreign and institutional investors with financial power mainly trade, and some individual investors have argued for the "abolition of short selling," claiming it causes stock prices to fall.

Brian Freitas, a researcher at SmartKarma Holdings, told Bloomberg, "The possibility of Korea moving from an emerging market to a developed market will become even more precarious due to the short selling ban," expressing concern that "if short selling no longer restrains absurdly high valuations, large bubbles will form in stocks favored by individual investors."

[Image source=Yonhap News]

The Korean stock market is currently classified under the emerging markets index by Morgan Stanley Capital International (MSCI). Financial authorities have aimed for inclusion in the developed markets index since 2008, and President Yoon Suk-yeol also raised expectations by making it a campaign pledge during the presidential election, but inclusion remains difficult. In June, there was an opportunity for inclusion, but MSCI did not include Korea in the developed markets index due to its relatively closed capital market for foreign investors and limited short selling.

Major foreign media pointed out that regulatory uncertainty in the Korean capital market has increased. One foreign media outlet introduced that "Korea reinstated the short selling ban for a 'level playing field,'" while also noting that "bureaucrats and market experts have cited uncertainty over short selling regulations as one of the factors influencing Korea's inclusion in the MSCI developed markets index, which has significant influence on the capital market."

Criticism has also emerged that the full short selling ban has political motives. In the past, financial authorities banned short selling during the 2008 global financial crisis, the 2011 European debt crisis, and the 2020 COVID-19 pandemic. All three times were during economic crises or crisis-like situations. However, this time, the short selling ban was introduced despite the absence of an economic crisis, making it difficult to avoid criticism that it is a populist policy for the general election. Bloomberg reported, "Ahead of the general election in April next year, ruling party lawmakers responded to individual investors' demands and urged the government to temporarily ban short selling," adding that "President Yoon Suk-yeol and the ruling party have been carrying out reform work including pension system reform and market monopoly prevention, and their approval rating has risen to 34% in recent months after a decline last year."

There are also criticisms that the full short selling ban goes against global standards. Only South Korea and T?rkiye are known to have completely banned short selling worldwide. The Philippines, whose economy is one-quarter the size of Korea's based on GDP, will, from the day Korea banned short selling, allow short selling for the first time on 52 stocks and one exchange-traded fund (ETF). The Philippine financial authorities made this decision 27 years after the Philippine Stock Exchange first proposed allowing short selling in 1996. Raymond Monzon, president of the Philippine Stock Exchange, stated, "If short selling or index futures trading is not allowed, the market will be one where only buying is possible. If economic, political, or emerging market uncertainties arise, foreign investors will sell all their stocks. However, allowing short selling enables foreign investors to stay in this market and hedge (risks)."

With the reinstatement of the short selling ban, trust in the Korean capital market is expected to decline, and the positive function of short selling in adjusting stock prices to their fair value will disappear, while the expected effect of boosting stock prices is likely to be minimal. Foreign media cited the Korea Exchange, reporting that in the Korean stock market worth $1.7 trillion (about 2,230 trillion won), the proportion of short selling accounts for only 0.6% of the KOSPI market value and 1.6% of the KOSDAQ, describing it as a "small proportion."