The time of choice is approaching. It’s about stock short selling. It will be decided next month whether to extend the ban on short selling, which ends March 15. Controversy over the resumption of short selling amid opposition from the politicians and individual investors that short selling is a “sloping playground” to foreigners and institutional investors is heating up.
In this situation, a new variable emerged. It is a Morgan Stanley Capital International (MSCI) index. There are concerns that a prolonged short-selling ban will reduce the proportion of Korea in the MSCI index, encouraging foreign funds to leave the domestic stock market. This is why it has become difficult for financial authorities to readily choose to extend the ban on short selling. The International Monetary Fund (IMF) also expressed concerns over the side effects of a full ban on short selling.
MSCI Index logo, one of the global investment indicators. Reuters = Yonhap News
“Round of influence of foreigners withdrawal of funds, up to 850 trillion won”
MSCI, along with the Financial Times Stock Exchange (FTSE) index, is a representative index used by global funds as an investment standard. Stock markets around the world are divided into advanced, emerging, and frontier markets, and the Korean stock market is included in the Emerging Countries (EM) index. Funds following this index buy Korean stocks for the share of the Korean stock market in the MSCI index.
As of the beginning of this month, Korea accounted for 13% of the MSCI EM index, second only to China (40%). If a specific fund invests 10 billion won in emerging countries, it is equivalent to investing 1.3 billion won in Korean stocks.
MSCI generally adjusts the proportion of index inclusions every half year (May/November). At this time, the industry said that the ban on long-term short selling for more than one year is a negative factor. Since short selling has been banned since March of last year, there are voices of concern that if it is not resumed in May after a year later, the proportion of Korean investment in the index of emerging countries may decrease. In fact, Turkey received a warning from MSCI in June last year that it would be demoted from the emerging markets index. This is because the ban on short selling was enforced in October 2019.
Samsung Securities researcher Kim Dong-young said, “Short selling is included in the evaluation criteria for the MSCI index on market autonomy.” “It can have a negative impact.”
The problem is that if the proportion of investment in Korea decreases, the following funds are likely to leave the domestic stock market. According to Samsung Securities, the amount of funds following the MSCI Emerging Countries Index is estimated at about $2 trillion (2,200 trillion won). A simple calculation means that even if the proportion of Korea is reduced by only 0.5 percentage points, 11 trillion won can be lost. Researcher Kim Dong-young analyzed that “if foreign funds account for one-third of the domestic stock market, the outflow of funds could be greater,” and “up to 850 trillion won is in the influence of the MSCI index.”
There are also voices of concern in the political world. Kim Byeong-wook, a member of the ruling party of the National Assembly’s Political Affairs Committee, and Democratic Party lawmaker Kim Byeong-wook said, “If the short selling ban is prolonged, it will be a factor of deduction when adjusting the weight of the MSCI index, and the damage could be greater than the shock that may occur due to the reopening of short selling.
Foreign net purchases in the KOSPI market. Graphic = Reporter Park Kyung-min [email protected]
“There will be no penalty such as weight reduction”
The incorporation into the MSCI developed countries (DM) index, which is the longing for the Korean stock market, could also be prevented. If Korea enters the MSCI Developed Countries Index, it is expected that 60 trillion won of funds will flow into the domestic stock market annually (Capital Market Research Institute), but its incorporation has been missed for over 10 years.
“The ban on short selling is a negative factor in the incorporation of indexes in developed countries,” said Lee Hyo-seop, head of the Financial Industry Dept. of the Capital Market Research Institute.
There are also voices that the impact on the domestic stock market will not be great. Ko Gyeong-beom, researcher at Yuanta Securities, said, “The ban on short selling may have an effect when the market is promoted, such as incorporation into indices in developed countries.” “He said.
The MSCI index has had a significant impact on the domestic stock market. In particular, the supply and demand of foreigners fluctuated due to the movement of China, which has the largest weight in the emerging countries index. When the proportion in the index changes, investors adjust their portfolio accordingly, because Korea is the country that suffers the most if the proportion of China increases.
Whenever large and small issues, such as the incorporation of China’s A-share MSCI Emerging Countries Index or the plan to list China’s Ant Group, came out, domestic market participants tapped on the calculator to win and lose. For example, if the MSCI Emerging Countries Index is adjusted due to the listing of Ant Group, there is concern that the Korean ratio will decrease. An asset management executive who wanted to remain anonymous said, “It is difficult to affirm that foreign funds are outflowed or outflowed by the MSCI index adjustment, but it is highly probable in terms of supply and demand.”
The share of each country in the MSCI Emerging Index. Graphic = Reporter Park Kyung-min [email protected]
In this situation, the IMF issued an opinion on the controversy over the short selling of the Korean stock market on the 28th. IMF Mission Director Andreas Bauer said, “In the case of Korea, since the market has stabilized after Corona 19 and the economy is recovering, it is possible to resume short selling.”
He pointed out, “It is important to ensure that all market participants as well as individual investors have equal opportunities, but trying to secure an equal market by banning short selling is to respond with a very blunt tool.”
Financial authorities’ concerns about whether to resume short selling are also expected to deepen. Finance Commissioner Eun Seong-soo made a reservation on the 18th, saying, “We expect to decide whether to resume short selling in February, but it has not been confirmed yet.”
Reporter Hwang Eui-young [email protected]