November 26, 2024

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Kim So-young, vice chairman of the Financial Services Commission, speaks during a press conference with foreign correspondents at the Press Center in Seoul on Friday. (Financial Services Commission)

South Korea's recent temporary ban on stock short selling is aimed at reinforcing the Korean market's fairness and the advancement of the market system, a top financial regulator said Friday.

Financial Services Commission Vice Chairman Kim So-young made the remark as he addressed foreign correspondents in Seoul, acknowledging the rising fear among global investors following the country's comprehensive ban of all short selling trades.

According to Kim, financial regulators discovered that some investors have been conducting large-scale naked short selling as "common practice."

"The prevalent practice of illegal short selling is a serious problem that can hamper fair price formation and undermine market credibility," the FSC vice chief said during a press conference with the foreign correspondents in Seoul on Friday.

Naked short selling refers to the unlawful practice of shorting shares without first borrowing them or confirming they could be borrowed.

Earlier last month, the financial watchdog announced it will ban naked short selling of stocks for around six months until June, 2024. The move came after it was revealed that two Hong Kong-based investment banks had been violating the naked short selling rules by shorting up to 56 billion won ($42.7 million) in securities.

Whether to fully lift the regulation after the set term will be decided with time.

Some have criticized the move, saying that the regulation was imposed based on political motivations to appease retail investors -- accounting for nearly 70 percent of the benchmark Korea Composite Stock Price Index -- and that it could lead to the mass exit of foreign investors, concerned of inefficiency and instability.

While acknowledging such voices, Kim reiterated the move was still necessary for the long-term improvement of the market. He noted that it is unfair to compare South Korea to more developed markets, such as that of the US, when the country still lacks an "up-to-date" system.

"It's not for the general short selling that the restriction came into force but for the illegal ones," he said, adding, "We are aware of the merits of short selling. ... But our market is yet to be advanced, while unlawful short selling is happening frequently."

Even with such an outdated system, regulators have discovered numerous cases of illegal short selling, other than the two already announced, meaning the act can be considered as prevailing or commonplace, Kim said.

"It is impossible to prevent them with the current system. We're not computerized yet, and in many parts, we still work manually. Right now, it's difficult even to detect and react to the illegal short selling.

While setting the goal to root out illegal naked short selling as the priority, FSC said the country could also gain the developed market status from Morgan Stanley Capital International, from the current emerging market status.

"An MSCI upgrade is not our goal. It would be good if we get it, but that will be just a part of the process to our final target," Kim said.

Advancement of the capital market is the key to resolving the so-called "Korea discount," a term referring to the undervaluation of the Korean stock market, making the market less appealing to investors, specifically foreign traders, Kim added.

For 2024's outlook, Kim predicted the domestic economy to show a growth rate of at least 2 percent.

"The economy hit the ground in the first half of the year and has been inching up since. I am not saying the economy was good in the second half, but it has improved. I expect the economy will be better next year, and the same applies for the capital market," he said.

By Choi Ji-won (jwc@heraldcorp.com)