South Korean regulator the Financial Services Commission (FSC) is set to lift its 17-month ban on short selling next week, a move that market participants believe will enhance liquidity, attract global hedge funds, and bolster the country’s case for an MSCI upgrade to developed market status, according to a report by Bloomberg.
The resumption of short selling on Monday will reopen the $1.7tn stock market to hedge funds and investment banks deploying short strategies, a long-awaited shift that could increase foreign investor participation. MSCI Inc, which has called for improved foreign access, may view this as a positive step in South Korea’s push to shed its emerging market label.
Several asset managers, including Pictet Asset Management, have signalled their intention to increase exposure to Korean equities following the ban’s removal. Amundi SA anticipates that the market will continue its upward trajectory, while Citigroup analysts recently raised their Kospi target by 4%, citing improved liquidity and increased foreign participation.
The FSC imposed the latest short-selling ban in November 2023, citing concerns over market fairness and illegal trading activities, particularly naked short selling – a practice of selling shares without borrowing them first.
Authorities have since investigated and penalised global banks for illegal trades, and a new electronic monitoring system will launch alongside the ban’s lifting to ensure compliance. Naked short selling remains strictly prohibited.
Prior to the ban, short selling accounted for approximately 5% of Kospi turnover in 2023, according to Bloomberg calculations based on exchange data.
With short selling reinstated, market participants expect a series of structural improvements, particularly if Korean companies address corporate governance concerns and enhance shareholder returns as part of the government’s “Value-Up” initiative.
The Kospi has already delivered a 7% gain this year, making it the second-best performing major Asian equity index, though global investors have largely remained on the sidelines, offloading $20bn in Korean stocks since August amid domestic political turmoil.
Citigroup analysts anticipate that the government will accelerate efforts to secure MSCI developed market status, suggesting Korea could be placed on MSCI’s watchlist by June 2025 or June 2026, with an upgrade potentially following a year later.
The return of short selling is also expected to revive South Korea’s convertible bond market, which has stagnated in recent quarters. Many hedge funds use convertible arbitrage strategies, which involve buying convertible bonds while shorting the underlying stock – a practice that has been largely absent due to the ban.
Academic research suggests that short-selling bans often hurt market liquidity rather than protect stock prices. A 2012 study in the Journal of Finance found that similar bans imposed after the 2008 financial crisis failed to stabilise stock valuations, particularly in small-cap stocks.
Some of South Korea’s most actively traded stocks could see significant volatility as short sellers re-enter the market. Samsung Electronics Co, the country’s largest company, is expected to be a prime short target, given concerns over its global competitive position.
Electric vehicle battery manufacturers such as Samsung SDI Co, Ecopro Co, and Posco Future M Co are also viewed as potential short-selling targets due to high valuations. However, Goldman Sachs analysts, including John Kwon, noted that there could be a short squeeze in the sector if investors react defensively following the lifting of the ban.
