[Initial Insight] Value Up vs Gongmaedo, Are They Opposite Directions?

"Short Selling Ban Not Allowed for Value Up"
Discomfort in Presidential Office over Financial Supervisory Service Chief's Remarks
Delayed Resumption Could Lead to Trust Decline

Short selling has once again become a hot topic in the stock market. Financial Supervisory Service (FSS) Chairman Lee Bok-hyun mentioned the resumption of short selling at an official overseas event, but the Presidential Office showed signs of discomfort. The Yoon Seok-yeol administration, which is enthusiastically promoting the atmosphere under the banner of 'Value-up' for the Korean stock market (K-market), seems to have judged the FSS chairman's remarks on resuming short selling as a 'spoiler.' The Presidential Office stepped in to manage the situation, stating that the resumption of short selling is the FSS chairman's 'personal hope.' This downgraded the chairman's comments made at a K-market promotion event held in New York to a personal opinion. This is evidence that the newly formed Presidential Office, reorganized with a new Chief of Policy at the beginning of the year, still views short selling with discomfort.

There is a question that arises while observing this situation: Why did the FSS chairman, who surely understands the Presidential Office's stance, make such remarks? Especially when meeting major overseas institutional investors with the shared national goal of 'Value-up.' The answer can be found in the chairman's statement. He said, "I agree with the market perception that the government and authorities promoting Value-up should not ban short selling." The market perception refers to the claims of major domestic and foreign institutional investors, and the chairman's statement can be interpreted as agreeing with these investors' opinions. It can be understood as a response to the consistent market argument and pressure that short selling is not a conflicting factor that undermines Value-up but rather necessary for it.

An executive from a foreign asset management firm evaluated, "There is a significant perception gap domestically on whether Value-up and short selling are seen as opposing or aligned, and this gap does not seem to narrow easily." He added, "When major domestic and foreign institutional investors decide on investments, they consider opportunities for stock price increases such as dividends or share buybacks, but also regard the freedom of strategy and tactics and the ease of exit (selling) strategies as key investment criteria." He continued, "For investors who prioritize the latter, short selling can be an important variable influencing major overseas investors' decisions to invest in or increase their allocation to the K-market." This suggests that Value-up and short selling should be viewed together from the perspective of a country's capital market policy and institutional competitiveness.

Most major overseas investors regard capital markets without short selling as backward markets. Our government has lost trust in policy execution by treating short selling, one of the institutional infrastructures of the capital market, as something to be turned on and off easily for political or other reasons. The justification for maintaining a long-term suspension of short selling is also weakening. The authorities said last year that they would resume short selling once a system to block illegal short selling was established, after temporarily suspending it. Following the plan, they detected illegal short selling by foreign investment banks (IBs) and began building a system to block illegal short selling. The longer the system construction is delayed, the more the timing for resuming short selling is postponed, and the recovery of trust will inevitably be delayed as well.

To restore the lost trust as soon as possible, some advance notice regarding the timing and procedures for normalizing short selling should be given before June, when the temporary suspension ends. If the government indefinitely extends the suspension citing system deficiencies or fails to clearly specify the timing and procedures for normalizing short selling, the market is likely to be disappointed again by delayed promises and policy ambiguity. The government, which aims to achieve Value-up, should not dismiss the FSS chairman's remarks on resuming short selling as merely a personal hope and overlook them.