South Korea's finance minister defended the government's ban on short-selling stocks, which comes ahead of general elections next year and has drawn criticism from analysts who say the move could hurt the country's appeal to global investors.
"Yes, it is rightfully done," Choo Kyung-ho said on Tuesday, responding to a lawmaker's question on whether he backed the sudden ban on the practice of selling borrowed shares.
The financial regulator on Sunday reimposed a full ban on short-selling until the end of June 2024 to create a "level playing field" for retail and institutional investors.
The benchmark Kospi stock market index fell 2.3% on Tuesday, a day after it recorded its sharpest one-day gain since early 2020. The junior Kosdaq index triggered a sidecar trading curb for a second straight day due to sharp fluctuations.
The ban, announced ahead of legislative elections in April, has a populist appeal among retail investors as public sentiment over the practice has generally been negative because it often triggers major price swings.
Analysts said the ban worsens foreign accessibility concerns flagged by global index provider MSCI Inc. South Korea has long aspired to join the firm's developed-market index.
"The move completely thwarted Korea's plans to convince MSCI that it deserves a spot in the developed market status. It came at an odd time too, as the market was recovering, not declining, and we're not in a middle of a crisis, either," said Cho Jun-kee, an analyst at SK Securities.
In June, the index provider again kept South Korea in its emerging market category even as the market size of the main Kospi and smaller Kosdaq indexes combined exceeds some of those already on the developed market list, such as Portugal.
Currently, there are a total of 23 countries listed on MSCI's developed market index, including five Asian markets: Australia, Hong Kong, Japan, New Zealand and Singapore.
Financial Services Commission Chairman Kim Joo-hyun was quoted by Yonhap news agency as saying the short-selling curb was not responsible for the fluctuations in the stock market.
"There were many factors to the rise yesterday and the fall today. The short-selling ban could be one of them, but I disagree it was because of that," he said.
Retail investors have become a key voting bloc in recent years. The number of retail stock trading accounts has roughly doubled since 2017 to about 14 million, with about one in every five Koreans having an account.
South Korea's Financial Supervisory Service in October said it would likely fine two Hong Kong-based investment banks it determined had engaged in naked short-selling transactions worth 40 billion won ($29.58 million) and 16 billion won respectively.
Earlier in the year, the regulator fined five foreign firms including Credit Suisse for naked short-selling, in which an investor short sells shares without first borrowing them or determining they can be borrowed.
