Bloomberg: "After South Korea's Short Selling Ban Extension, Aftershocks Will Be Significant"

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[Asia Economy Reporter Yujin Cho] Concerns have been raised over potential backlash as South Korea, which has long banned short selling, extends its short selling ban once again.

On the 4th (local time), Bloomberg reported that South Korea, which has imposed the longest short selling restrictions globally, is artificially supporting the market rally with this extension decision.

It also stated that the temporary extension, justified by increased market volatility, may instead cause adverse effects.

The Financial Services Commission announced the day before that the short selling ban will be extended until May 2 for all investors, including institutions, foreigners, and individuals, but only for stocks included in the KOSPI 200 and KOSDAQ 150 indices. For other stocks excluding large-cap stocks, the ban will be extended indefinitely.

In March last year, when stock prices plummeted due to COVID-19, financial authorities banned short selling on all stocks. The ban was extended once in August last year due to market volatility and was initially set to end on April 15, but this decision further extends it to May 2.

The main rationale for this extension is to minimize market shocks. The idea is to reduce impact by partially resuming short selling instead of restarting it all at once. The plan is to resume short selling mainly on large-cap stocks to prevent overall stock indices from shaking and to curb market volatility. However, the report expressed concerns that "this may instead cause adverse effects."

Vince LoRusso, a fund manager at ChangeBridge Capital based in Boston, said, "There is little evidence that banning short selling increases market liquidity or reduces volatility," adding, "Criticism that short selling bans are ineffective in curbing market volatility has been consistent."

There are also concerns that the prolonged short selling ban may cause greater side effects. Short selling plays a positive role in preventing stock market overheating and helping find appropriate stock prices when the market functions normally. In markets without short selling, stock prices tend to be overvalued compared to their actual value, leading to price bubbles.

The report noted, "South Korea's short selling ban is one of the longest globally," and added, "Many European countries, including France, Italy, Spain, and Greece, imposed full short selling bans last year due to COVID-19 but resumed after two months due to concerns over side effects." Among emerging markets, Malaysia lifted its short selling ban early in December last year, and Indonesia is also close to lifting it.

The report pointed out that South Korea's decision to postpone the resumption of short selling until May likely stems from political considerations related to the April by-elections and next year's presidential election. Jeon Kyung-dae, Chief Investment Officer (CIO) of Macquarie Investment Trust Management's equity division, said, "Populism in Korean politics triggered the extension of the short selling ban," expressing concern that "financial authorities are being swayed by public opinion."

This content was produced with the assistance of AI translation services.