[The Editors' Verdict] The Stock Market Remains a Playground for Foreign Investors

Professor Kim Sang-bong, Department of Economics, Hansung University

The stock market has been plummeting since the beginning of the new year. Although stock indices have also declined overseas, the drop in the domestic market has been embarrassingly steep. Last year’s economic growth rate was reportedly better than other countries, and corporate earnings were not bad either. Real estate prices have increased dozens of times over the past 10 years, but stock prices, after a brief rise last year, have been falling sharply day after day. Considering inflation, there has been little real increase compared to 10 years ago. Of course, some stocks have risen, but many more have fallen. There are various reasons for this: the global economic situation, inflation, interest rate hikes, geopolitical risks related to North Korea, and wars in other countries. In this situation, the most important factor is policy.

The government plans to submit an application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in April. Along with this, it intends to prepare amendments to the Foreign Exchange Transactions Act within the year to modernize the foreign exchange transaction system. This appears to be aimed at inclusion in the Morgan Stanley Capital International (MSCI) developed markets index. Short selling will also be fully permitted. This is interpreted as a measure to enhance foreign investors’ market accessibility while maintaining stability in the foreign exchange market.

The foreign exchange market has maintained its current state for over 20 years. The offshore market is also active. In other words, this is not something that happened suddenly yesterday or today; the announcement at this point is abrupt. Such decisions will pass the burden to the next government, not the current one. There is no analysis of how this situation benefits domestic companies and citizens. The only logic is that since it is a developed country, the capital market must also be developed.

Looking microscopically, the Korean stock and derivatives markets have long been playgrounds for foreigners. They were so-called cash ATMs for foreign investors. The damage was borne entirely by domestic investors who invested in domestic companies, and individuals stopped entering the stock market. After the outbreak of COVID-19, Korea was hit second only to China, and stock prices plummeted. When short selling was temporarily suspended, retail investors began buying stocks to improve returns and protect domestic companies.

In other words, retail investors started making profits in an environment where many unfavorable conditions were removed. One of the commonly cited tilted playing fields is the stock market. Because it is unfavorable to retail investors, when prices fall, they incur losses and stop entering the market. The short selling repayment period and collateral ratio should be made equal for individuals, and penalties for naked short selling should be strengthened.

If Korea enters the MSCI index, some index-tracking funds may initially flow in. However, no retail investor believes this will continuously support the index. If stocks in the current KOSPI or KOSDAQ become subject to short selling, they initially rise but then fall immediately, so retail investors dislike stocks subject to short selling and prefer those exempt from it. The playing field is so tilted that it is as if the home court has simply been handed over.

Without institutional reforms related to the stock market, only the government pushing this forward or foreign investors who benefit will be happy if “our stock market is included in the developed country index.” It is better to either improve the system and pursue inclusion in the developed market index or give up. It is hard to understand why, without preparation, the value of domestic companies and individuals’ assets are being handed over to foreigners. One cannot help but ask again whether domestic citizens or foreigners and some institutions are more important.

Kim Sang-bong, Professor of Economics, Hansung University

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