Title: International Criticism Mounts over Korea’s Ban on Short Selling
Introduction:
The financial authorities’ complete ban on short selling has sparked intense debate both domestically and internationally. While the public opinion in Korea remains divided, foreign media outlets and experts are increasingly critical, citing concerns over its impact on inclusion in the MSCI developed countries index and the perceived political motive behind the ban.
Divergent Opinions at Home and Abroad:
A review of domestic and foreign media reports reveals stark differences in public opinion regarding the total ban on short selling, which was implemented recently. Even within Korea, skepticism exists about the ban’s effectiveness and the questionable timing of its implementation.
Though the financial authorities have cited instances of illegal short selling by foreign investment banks (IBs) as the impetus for the ban, the most recent case was detected over a month ago. This raises doubts about why the authorities did not take action earlier to prevent further damage.
Additionally, the changing stance of the financial authorities, notably the Financial Services Commission Chairman Kim Joo-hyun and Financial Supervisory Service Chairman Lee Bok-hyun, has attracted suspicion. Their initial negative stance has seemingly shifted 180 degrees after the ban was implemented. This has fueled speculation that the ban serves a political purpose ahead of next year’s general election, given the negative sentiment among individual investors towards short selling.
Contrasting Views and Market Reaction:
Some argue that the ban on short selling will help boost stock prices, which have suffered from short selling activities. However, on the day the ban was enforced, KOSPI and KOSDAQ closed down by 2.33% and 1.80% respectively, compared to the previous day. This suggests that any positive impact of the ban on stock prices is temporary.
Foreign Media’s Harsh Criticism:
International media outlets have closely followed Korea’s ban on short selling and have mostly taken a critical stance. Bloomberg has highlighted concerns such as potential outflows of foreign currency from the Korean stock market and its exclusion from the MSCI developed countries index. They also predict a decline in market transparency and attractiveness.
Foreign experts have echoed these sentiments. Woongmo Kang, a researcher at American asset management company Exom, questions the timing of the ban and labels it a political maneuver. He predicts that foreign investors will lose confidence in the Korean stock market, ultimately eroding its long-term credibility.
Gary Dugan, Chief Investment Officer of Dharma Asset Management, warns that the ban may harm the Korean stock market’s status and hinder its inclusion in the MSCI index. He believes that the initial stock market surge following the ban will be short-lived due to the low level of short sellers in the Korean market.
Japanese media outlet Money 1 argues that the ban reflects political motives, while Chinese media outlet Cheil Finance suggests that it exploits individual investor complaints abroad as a means to secure votes in the upcoming general election.
Neighboring countries like China, Taiwan, and Japan have also expressed criticism, questioning the ban’s timing and the intentions behind it.
Concerns and Expert Views:
Some experts caution against an overheating stock market and the potential formation of bubbles in the absence of brakes on stock prices. They draw parallels to Greek mythology, comparing the situation to Icarus who flew too close to the sun, causing his wings to melt and his eventual downfall. The risk of a bubble and subsequent market crash cannot be overlooked.
Domestic experts, such as Kang Jae-hyun from SK Securities and Kim Jun-seok and Hwang Se-un from the Korea Capital Market Institute, worry that the ban will reduce stock market efficiency and increase volatility. They argue that existing research on short selling restrictions suggests that such measures lead to high volatility and inefficiency.
Conclusion:
The complete ban on short selling has triggered polarized views, both domestically and internationally. While domestic critics raise questions about its effectiveness and motive, foreign media and experts intensify their criticism, chiefly focusing on the impact on market inclusion and perceived political intent. The short-term surge in stock prices following the ban does not negate concerns about market volatility and efficiency. As the debate continues, it is crucial to carefully assess the long-term implications of such a significant measure.
[비즈니스포스트] Although public opinion is significantly divided domestically regarding the financial authorities’ outright ban on short selling, harsh criticism continues abroad.
Foreign media and foreign experts are increasing the intensity of criticism, focusing on ‘preventing inclusion in the MSCI developed countries index’ and ‘political intent’.
▲ Most foreign countries seem to criticize the Korean financial authorities’ complete ban on short selling. <그래픽 비즈니스포스트>
When compiling domestic and foreign media reports on the 7th, it seems that there are quite different public opinions domestically and abroad regarding the total ban on short selling that came into effect the previous day.
First of all, even in Korea, there is skepticism about the total ban. The main response is that the timing of the implementation of the measure is questionable.
It is true that there are cases of illegal short selling without borrowing by foreign IBs (investment banks) that the financial authorities indicated as the background for the implementation of the measure, but the latest case that was caught was in the middle of last month. If they had actually sensed a problem, they should have implemented a total ban at the time to prevent further damage.
The fact that the position of the financial authorities is changing as if turning the palm of their hand also raises doubts. Financial Services Commission Chairman Kim Joo-hyun and Financial Supervisory Service Chairman Lee Bok-hyun have expressed a negative stance on the total ban on short selling for reasons such as ‘blocking inclusion in the MSCI developed countries index’ and ‘non-compliance with world selling – wide standards’, but their attitudes have changed 180 degrees after the implementation of this measure.
The sudden implementation of the measure was highlighted on the 5th, two days after a KakaoTalk message from Rep. Song Eon-seok of the ruling People Power Party, saying, “We will focus on short selling next,” openly on the 3rd, also fueled the debate. It is suspected that this is a political ploy for the general election in April next year, given the strong negative public opinion about short selling by individual investors.
However, there is a contrary view that stock prices, which have been depressed by short selling, rise and regain their original position due to the total ban.
However, on this day, KOSPI and KOSDAQ closed down 2.33% and 1.80%, respectively, compared to the previous day. Since the buying trend of short coverage (liquidation of short sales), which led to the previous day’s rapid increase, has subsided, the increase in stock prices due to the total ban appears to be limited to a one-time prescription.
Foreign media outlets are also paying close attention to Korea’s total ban on short selling, and almost all of them are taking a harsh view.
Bloomberg reported, “The outright ban may lead to an outflow of foreign currency from the Korean stock market and make it difficult to be included in MSCI’s developed countries index. There is also a view that it will worsen the transparency of the stock market and reduce its attractiveness.”
Bloomberg added, “The share of short selling in the Korean stock market is not large, which is 0.6% for KOSPI and 1.6% for KOSDAQ,” and also conveyed the opinions of various experts.
Woongmo Kang, a researcher at Exom, an American asset management company, said, “I cannot understand why a total ban has been implemented at this time,” adding, “Most people see it as a political ploy that has ‘to aim for next year’s general election with individual investors in mind.’
He continued, “Foreign investors will lose confidence in the Korean stock market,” and “If investors cannot identify overheating, the long-term credibility of the stock market will be undermined.”
Gary Dugan, CIO (Chief Investment Officer) of Dharma Asset Management, also said, “It will damage the status of the Korean stock market and will definitely have a negative impact on its inclusion in the MSCI index.” He added, “The stock market will rise initially, but it will not last long because of the low proportion of short sellers in the Korean stock market.” “It is,” he said.
Reuters columnist Ura Galani said, “Usually, a ban on short selling is used as a last resort in an economic crisis,” and added, “It is regressive for Korean financial authorities to play the card of a complete ban on short selling . when that’s not the case.”
He added, “Other Asian countries, such as the Philippines, are taking the other step in opening their short selling markets,” and added, “Foreigners and institutional investors, who have lost their means of hedging, may leave.”
The Financial Times also assessed that there was political intent, saying, “This total ban is aimed at appeasing individual investors ahead of the general election in April next year.”
▲ Unlike Korea, the Philippines has allowed short selling in the stock market since the 6th. The photo is from the Philippine Stock Exchange. <위키피디아>
Criticism continues not only in English-speaking countries, but also in neighboring countries such as China, Taiwan, and Japan.
Chinese media outlet Cheil Finance said in an interview with former Citadel quantitative trader Chen Tarong, “This measure is related to next year’s general election,” and “It is an attempt to win votes in the general election by exploiting investor complaints individual about abroad. IBs and short selling.” “Rather, there is a possibility that market volatility will increase,” he said.
Taiwan’s Central News Network also reported, “There are questionable opinions about the timing of this measure,” and “It is intended to quell the anger of individual investors ahead of next year’s general election.”
Japanese media outlet Money 1 said in an article titled ‘Korea’s complete ban on short selling by financial authorities, it is not a developed country’, “The problem is that this ban came from highly political motives,” and “In in short, there is a popular ploy by the ruling party and the opposition also opposes it.” He said, “A difficult issue arose.”
In addition, some views raise concerns about stock market overheating and bubbles in a situation where the brakes on stock prices have disappeared. Just like in Greek mythology, where Icarus only rose upwards, his wings melted and he fell, the risk of a bubble and crash in the stock market may increase.
Domestic experts also express concerns. Kang Jae-hyun, a researcher at SK Securities, said, “As many research results on short selling show, short selling restrictions actually cause high volatility and inefficiency,” and added, “This phenomenon is already underway to a great extent.”
Kim Jun-seok and Hwang Se-un, researchers at the Korea Capital Market Institute, also expressed concern that “a complete ban will reduce the efficiency of the stock market price and increase volatility.” Reporter Kim Tae-young
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