A pedestrian walks by an electronic board displaying closing rates of Korean stock markets at the Korea Exchange headquarters in western Seoul on Dec. 30, 2024. [NEWS1]

 
After nearly a year and a half, Korea’s ban on short selling is finally set to be lifted on March 31 — and some are hopeful that the first full removal since the Covid-19 pandemic could bring foreign investors back to the country’s stock market.
 
As the deadline draws near, analysts anticipate that a brief surge in volatility may drive some outperforming or higher-valued stocks down amid persistent market uncertainty before an eventual stabilization.
 
 
The Korean government implemented a temporary ban on short selling during the Covid-19 pandemic in March 2020, which it later partially lifted in May 2021 to allow the practice for 200 Kospi-listed stocks and 150 Kosdaq-listed ones.
 
However, regulators fully reinstated the ban in November 2023 after uncovering cases of naked short selling, the illegal practice of shorting stocks without first borrowing them, at global investment banks. The suspension, which had originally set to be lifted by June of last year, was extended for an additional 10 months, and the authorities announced a major regulatory and systemic overhaul.
 
But Korea now appears committed to lifting the ban, with a centralized detection system in place, as part of its capital market advancement initiative.
 
“As the authorities have been refining the system and regulations for more than a year, there is no reason for a partial removal of the ban,” Financial Services Commission Chairman Kim Byoung-hwan said on Feb. 24.
 
The short selling ban has been criticized as undermining the Korean market’s competitiveness. Morgan Stanley Capital International cited the ban for Korea’s “emerging market” classification in its Global Market Accessibility Review last June, characterizing it as a “deterioration” of market conditions.
 
“If a potential moderation of the dollar’s strength coincides with the lifting of the short selling ban, the influence of foreign investors on the domestic stock market will increase,” said Hana Securities analyst Lee Jae-man.
 
“In the short term, demand for short selling so-called soft AI stocks that have been on a steep price surge may increase,” said KB Securities analyst Lee Eun-taek, indicating that the upcoming lifting of the ban could briefly drive investors to off-load shares in advance.
 
“But in the longer run, outperforming stocks will continue to outperform, and underperforming ones will remain weak,” said Lee, adding that global trends, rather than domestic issues, would continue to drive the trajectory of leading shares.

BY SHIN HA-NEE [[email protected]]