[Initial Insight] Short Selling, Bell on the Cat's Neck

[Image source=Yonhap News]

[Asia Economy Reporter Ji Yeon-jin] "Currently, South Korea is the only country in the world that bans short selling."

A financial official I recently met expressed frustration. This is because strong opposition from individual investors is expected ahead of the full resumption of short selling, which was partially reinstated on May 3 last year. Short selling is a means to expand the playing field rather than a tilted one, but since it is regarded as the culprit behind stock price declines, the timing for its full resumption is still being weighed. It was rare to feel such 'boldness' in the public sector, where 'lack of spirit' is usually considered a virtue.

Short selling is once again becoming a hot issue. This is because LG Energy Solution became a target of short selling right after being included in the KOSPI 200 on the 11th. According to the Korea Exchange on the 16th, LG Energy Solution saw short selling worth 657.8 billion KRW over three trading days: 262.8 billion KRW on the 11th, 291.8 billion KRW on the 14th, and 103.5 billion KRW on the 15th. During this period, the total short selling volume on the KOSPI was 2.1129 trillion KRW, with about 30% concentrated on LG Energy Solution.

LG Energy Solution ranked second in KOSPI market capitalization immediately after its listing in January. On the first day of listing, its stock price soared to 598,000 KRW, nearly double the public offering price of 300,000 KRW, but then plummeted vertically due to a selling barrage by foreign investors. Foreign investors net sold nearly 3 trillion KRW on the first day of listing and have continued to sell since. This marks 19 consecutive trading days of net selling since the 15th of last month. Although it is the leading stock in electric vehicle batteries, foreign investors judged it to be overvalued. In fact, LG Energy Solution's expected price-to-earnings ratio (PER) for this year is 111.99 times. PER is calculated by dividing the stock price by earnings per share and is an indicator used to assess how many times the stock price is compared to earnings per share. A high PER multiple means the stock is overvalued relative to its performance. Samsung Electronics, which has the largest market capitalization, has an expected PER of 10.72 times this year. While short selling has contributed to pulling down LG Energy Solution's stock price, it is part of the process of finding a fair price.

Short selling has more positive functions such as price discovery, liquidity provision, and hedging. Most of the system improvements that individual investors worried about as a 'tilted playing field' have been made. Currently, the 350 stocks eligible for short selling account for about 80% of the domestic stock market capitalization. Even if short selling is fully resumed, the impact on the stock market is expected to be minimal. Professor Ahn Hee-jun of Sungkyunkwan University's Department of Business Administration analyzed the effects of short selling restrictions implemented in Asian countries during COVID-19 and found that, overall, banning or restricting short selling increased stock price volatility and led to declines in price discovery and liquidity, thereby deteriorating overall market functions.

The government banned short selling entirely on March 16, 2020, when the stock market crashed due to COVID-19. Partial resumption was made on May 3 last year for KOSPI 200 and KOSDAQ 150 stocks, but full permission has not yet been granted. South Korea has thus become a country where short selling has been suspended for two years. During this period, the KOSPI reached an all-time high of 3,300 points and then declined. The domestic stock market, bruised by fears of the Ukraine war, is expected to struggle to rebound for the time being as the US is anticipated to raise interest rates this month. This is why it is necessary not to hesitate or waver while watching individual investors' reactions.

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