[Asking the Future of the Korean Capital Market] Short Selling to Resume Next Year and Must Ride the 'MSCI Developed Index'

①-⑵The current administration's pledge to join the 'MSCI Developed Markets Index'
MSCI points out issues with Korea market accessibility
"Inclusion possible after short-selling system is fully established and resumed"

Editor's NoteAt the beginning of this year, financial authorities focused their policy efforts on enhancing corporate value by promoting a 'Corporate Value-Up Program' to resolve the undervaluation phenomenon of the domestic stock market (Korea Discount). After the Value-Up Program was unveiled last May, the domestic stock market briefly rose centered on beneficiary stocks but peaked in July and has since been on a downward trend. Due to uncertainties surrounding the second Trump administration's policies after the U.S. presidential election and concerns over the deterioration of the Korean economy caused by strong dollar pressures, the KOSPI index even fell below the 2400 level, creating a precarious situation. As concerns over foreign exchange losses due to the high exchange rate intensified, foreign investors' withdrawal accelerated. Asia Economy conducted a relay interview with overseas institutions to explore what changes are necessary for foreign investment funds to flow into Korea. Through this, we seek solutions to expand foreign investors' inflow into the Korean market and examine policy tasks that need to be addressed.

Experts are increasingly voicing that short selling should resume next year and that Korea should take a step closer to inclusion in the Morgan Stanley Capital International (MSCI) Developed Markets Index. This is because the domestic stock market has not gained momentum despite the government's strong push for the Value-Up Program this year. The financial investment industry believes that inclusion in the MSCI Developed Markets Index can resolve the Korea Discount (undervaluation of the Korean stock market).

Yonhap News

Inclusion in the MSCI Developed Markets Index is one of the pledges the Yoon Suk-yeol administration promised to achieve during its term. Typically, inclusion in the MSCI Developed Markets Index is announced one year after a country is placed on the watchlist of candidate countries. Therefore, for the current administration to secure inclusion within its term, being listed on the watchlist next year is the last opportunity.

So far, the government has been actively working to improve corporate governance, foreign exchange market accessibility, and the full resumption of short selling, which MSCI had pointed out. Since the beginning of the year, the government has been vigorously promoting the 'Corporate Value-Up Program' in response to foreign investors' evaluations that corporate governance is not transparent. To enhance foreign exchange market accessibility, structural improvements have been made through the 'Foreign Exchange Market Modernization Plan,' including extending foreign exchange market hours and expanding foreign financial institutions' market participation. Additionally, English disclosures are being gradually expanded to improve foreign investors' access and trading convenience in the domestic market.

Now, among the issues MSCI pointed out for inclusion in the Developed Markets Index, the remaining improvement needed is the resumption of short selling. The government had imposed a temporary ban on short selling until June this year due to illegal short selling detected by global investment banks (IBs) in November last year, and extended the ban until the end of March next year citing system deficiencies. On the 5th, the government approved a revision to the Enforcement Decree of the Capital Markets Act at the Cabinet meeting to strengthen the disclosure standards for short selling balances, which is interpreted as a strong will to thoroughly improve related systems for the resumption of short selling next year.

Recently, the government has frequently mentioned the resumption of short selling and inclusion in the MSCI Developed Markets Index. On the 11th, Kim So-young, Vice Chairman of the Financial Services Commission, said at a foreign press briefing, "MSCI has often pointed out issues regarding market accessibility related to the domestic stock market," adding, "Next year, the possibility of inclusion in the MSCI Developed Markets Index, including the resumption of short selling, will be much higher than before." On the 13th, Lee Bok-hyun, Governor of the Financial Supervisory Service, met with overseas investors and stated, "We are promoting capital market modernization and aligning with international standards, but the reality of a full ban on short selling is frankly embarrassing."

In the securities industry, there is an analysis that if short selling resumes as scheduled, Korea's inclusion in the MSCI Developed Markets Index will be possible. KB Securities researcher Ha In-hwan said, "Various financial market-related policies, including dividend improvement plans that the government has been promoting since last year, were all measures to improve the issues MSCI pointed out about Korea," adding, "Now, the government is intensifying efforts to fully resume short selling, the remaining task. The final effort for MSCI Developed Markets Index inclusion points to June next year." He also said, "Along with this, if the ongoing Value-Up Program continues to improve corporate governance, inclusion in the MSCI Developed Markets Index will not be an impossible task."