South Korean Stocks Surge as Regulators Reimpose Full Ban on Short-Selling
South Korean stocks experienced a significant surge following the reinstatement of a full ban on short-selling by regulators. The ban, which will be in place for approximately eight months, is aimed at curbing the illegal use of short-selling tactics employed by hedge funds and other investors globally. While the move may appeal to retail investors who have raised concerns about the negative impact of short-selling, it could potentially deter foreign investors and hinder MSCI Inc. from upgrading Korean equities to developed market status from their current emerging market classification.
The benchmark Kospi rose by as much as 4%, marking its most substantial increase since January 2021. This surge led gains among major regional gauges in Asia on Monday. Stocks that had experienced recent increases in short-selling positions, such as LG Energy Solution Ltd. and Posco Future M Co., were among the primary beneficiaries of this upward momentum. Additionally, the small-cap Kosdaq Index saw a surge of up to 5.9%, the most significant rise since June 2020.
The Financial Services Commission of South Korea announced on Sunday that new short-selling positions for equities listed on the Kospi 200 Index and Kosdaq 150 Index will be prohibited from Monday through the end of June 2024. These indices had temporarily lifted pandemic-era restrictions on short-selling in May 2021, while the ban remained in place for approximately 2,000 other stocks.
The decision to reinstate the ban comes ahead of the country’s general elections in April for the National Assembly. Short-selling remains highly unpopular among the general public in South Korea, and some lawmakers from the ruling party have even called for a temporary end to the practice in response to demands from retail investors who have staged protests against it. However, it’s worth noting that most short-selling in the country is conducted by institutional investors.
While regulators argue that naked short-selling, which involves shorting shares without borrowing them first, leads to unfair price formation and undermines investor confidence, some observers have voiced concerns that broad outright bans on short-selling make the market less transparent and consequently less attractive. Others believe that these restrictions might prevent the market from being upgraded in MSCI indexes.
There are potential repercussions in terms of international investors losing trust and opportunities in the Korean market, according to analysts. Without the ability for investors to express their views on mispriced markets and individual stocks, stock markets may lose credibility on a global scale.
In summary, the reimposition of a full ban on short-selling has generated a surge in South Korean stocks. While the move aims to address concerns raised by retail investors, it may discourage foreign investment and impact the country’s classification in MSCI indexes. The decision has both its proponents and critics, with some believing it will bring fairness to the market while others question the transparency and long-term credibility of such a move.