[Diagnosis of Yoon Administration's Capital Market Policy] Absolute Support for Abolishing or Postponing Financial Investment Tax... "Short Selling is Necessary in the Capital Market"

Government Policy Evaluation Survey for Securities Firms
80% of Securities Firms Say "Personal Funds Will Withdraw Due to Financial Investment Tax"
"Caution on Short-Term Volatility if Short Selling Resumes"

Nine out of ten securities firms judged that the Financial Investment Income Tax (FIIT) should be 'abolished or postponed.' This is due to concerns that it could lead to the outflow of mid- to long-term funds from individual investors. Additionally, all securities firms pointed out that short selling is necessary for the stock market. However, they advised caution as small- and mid-cap stocks, which have concentrated supply and demand, may experience increased short-term volatility when short selling resumes.

According to a survey conducted by Asia Economy on the 27th targeting 10 major domestic securities firms regarding the 'Yoon administration's capital market policy,' 90% of the respondents answered that the FIIT should be 'abolished or postponed.' Only one firm said it could be 'relaxed,' and no securities firm responded that the FIIT should be implemented. Regarding whether funds would exit the domestic stock market if the FIIT is implemented, 80% answered 'yes.' Furthermore, 100% responded that short selling is necessary for the securities market.

Most Securities Firms Say "FIIT Should Be Abolished or Postponed... Due to Concerns Over Fund Outflow"

The abolition of the FIIT has been a matter actively pursued by the Yoon Seok-yeol administration. Originally, the FIIT bill was passed in 2020 through bipartisan agreement during the Moon Jae-in administration, but its implementation has currently been postponed until 2025. Unlike in the past, the securities industry is concerned that the increased influence of individuals in the financial market could lead to individual investors withdrawing their holdings to avoid tax imposition if the FIIT is implemented. According to the financial investment industry, the number of individuals investing in domestic stocks has surged about fourfold to approximately 15 million over five years.

An official from a securities firm expressed concern that the FIIT would cause the outflow of individual funds over a long time horizon rather than causing short-term supply-demand volatility. He said, "Considering the gap between overseas stock investments such as in the U.S. and the long-term expected returns of the Korean market, the implementation of the FIIT could lead to the outflow of mid- to long-term funds from individual investors." He added, "The balance of overseas investments, mainly in the U.S., has already surged historically. The FIIT will accelerate this trend."

He continued, "The government is promoting a value-up program encouraging companies to participate voluntarily rather than mandatorily, which I believe is to foster a sound investment culture," adding, "If the FIIT issue is resolved along with companies' efforts, the investment culture, including long-term investments by individuals, can improve."

Illegal Short Selling Can Be Prevented by NSDS... "Volatility Should Be Watched When Resuming"

In the domestic stock market, short selling was banned three times: from October 1, 2008, to May 31, 2009, during the global financial crisis; from August 10 to November 9, 2011, during the European debt crisis; and from March 13, 2020, to April 30, 2021, during the COVID-19 pandemic. The current short selling ban, which began last November and was initially scheduled to last until the end of June this year, has been extended until March 2025, when the Short Selling Central Monitoring System (NSDS) is completed.

An official from the asset management industry said, "Once the Short Selling Central Monitoring System is fully established, it will be possible to prevent most illegal short selling," adding, "Rather than adding other supplementary measures, properly operating this system will yield clear results." He also said, "If illegal short selling groups emerge even after the system is completed, they should be punished more severely."

The securities firms that responded to the survey expressed the opinion that although market shocks that may occur when short selling resumes cannot be avoided, they are manageable. Securities Firm A said, "Certain stocks may experience significant shocks when short selling is implemented, so it may be necessary to adjust the timing of resumption," but predicted, "However, the shock will be short-term." Securities Firm B said, "In any case, one shock is unavoidable. If short selling resumes when the market is good, the shock will be less," and judged, "After short selling resumes and time passes, the market will stabilize, and in the mid- to long-term, it will positively contribute to maintaining the soundness of the stock market."

However, there are voices advising caution regarding small- and mid-cap stocks with concentrated supply and demand. An industry official said, "Past short selling bans were implemented during times of significant market volatility, so it is difficult to assess the impact of lifting the ban next year," but added, "Still, resuming short selling is necessary. It is quite rare for advanced stock markets to ban short selling." He advised, "For small- and mid-cap stocks such as those in the KOSDAQ150, volatility may increase in the short term when short selling resumes, so caution is needed."