Foreigners Playing with 70 Trillion Won Bomb Short Selling... Full Resumption for Advanced Country Index Sparks Retail Investors' Outrage

Financial Authorities Set Goal to Fully Resume Short Selling Within First Half of Year
Presidential Candidates Call for System Improvements Before Allowing Amid Individual Investors' Backlash

[Asia Economy Reporters Seon-ae Lee and Myunghwan Lee] 71.4281 trillion KRW. This was the amount of short selling by foreigners in both the KOSPI and KOSDAQ markets last year. The proportion of short selling by foreigners in KOSPI and KOSDAQ was 77.29% and 66.92%, respectively. This clearly proves that short selling is truly a "playground for foreigners." The situation has not changed in the new year. Due to the rampant short selling by foreigners, the Korean stock market still carries the stigma of being a "tilted playing field," but the financial authorities have set a plan to fully resume short selling within the first half of the year to be included in the Morgan Stanley Capital International (MSCI) developed markets index, which has frustrated individual investors. However, presidential candidates, mindful of their voter base, have unanimously stated that improvements are necessary for the "full allowance of short selling," which is expected to influence the decision and timing of the resumption.

According to the financial investment industry on the 7th, the government's target schedule for MSCI developed market inclusion is ▲ June 2022 listing as a watchlist country ▲ June 2023 decision on MSCI developed market inclusion ▲ June 2024 actual inclusion in the MSCI developed market index. Among the two key conditions required by MSCI, the improvement of the foreign exchange market has already been officially announced, and the other condition, the full resumption of short selling, is targeted within the first half of the year.

Hainhwan KB Securities researcher said, "To be listed on the watchlist by June as the government aims, short selling must be fully resumed by May at the latest," adding, "Considering the March presidential election, a decision to resume short selling could be expected this month, followed by the full resumption process in March or April."

The variables are the intense opposition from individuals and the voices of presidential candidates. They argue that institutional improvements are necessary so that individuals are not disadvantaged compared to foreigners and institutional investors in short selling. They emphasize opinions that preconditions are needed for full allowance of short selling or that the short selling system should be flexibly operated depending on market conditions, which is expected to deepen the financial authorities' dilemma. The Korea Exchange also remains reserved about the timing of full resumption, stating that specific timing and methods need to be discussed with the financial authorities.

The reason for individuals' frustration is clearly reflected in the numbers. In January, the short selling amounts in KOSPI and KOSDAQ were 11.5033 trillion KRW and 3.4758 trillion KRW, respectively. Among these, foreigners accounted for 71.46% and 68.61%, respectively. Last year, from the resumption of short selling on May 3 until the last trading day on December 30, foreigners boasted overwhelming proportions (77.29%, 66.92%).

Institutions held market shares of 26.61% and 28.74% in the KOSPI and KOSDAQ markets, respectively, in January. Last year's proportions were 20.87% and 30.59%, respectively. Individuals lag far behind in short selling, with shares of only 1.93% in KOSPI and 2.65% in KOSDAQ as of January. Last year, these were even lower at 1.84% and 2.49%, respectively.

Kyungsoo Lee, a researcher at Hana Financial Investment, explained, "The full resumption of short selling to challenge MSCI developed market inclusion is a negative issue for high-valuation individual stocks." Another researcher, who requested anonymity, also raised their voice, saying, "If short selling resumes without institutional improvements and Korea is included in the developed market index, the benefits will still go to foreigners rather than individuals." Researcher Hainhwan also cautioned, "Care is needed at the moment of resumption."

Opinions are even divided on the pros and cons of MSCI developed market inclusion. The Korea Economic Research Institute predicted that inclusion in the MSCI developed market index would bring in foreign capital of approximately 15.9 billion to 54.7 billion USD, potentially raising the KOSPI to 3,418 to 4,035 points. On the other hand, Hanwha Investment & Securities forecasted that if the Korean stock market is promoted to the MSCI developed market index, about 2.83 billion USD (3.38 trillion KRW) of passive funds would flow out.

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