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there is big news from the korean stock market.

on september 12, local time, south korea's top financial regulator announced plans to lift the ban on short selling of stocks by the end of march next year. kim byung-hwan, chairman of the financial services commission, said that the law is being revised to ensure that relevant systems are in place, with the goal of resuming short selling of all stocks by the end of march next year.

judging from the market reaction, the news of lifting the short-selling ban has not had a negative impact on the korean stock market for the time being. today, major stock indices in asia-pacific rose collectively, and the korean composite index also rebounded strongly, rising 2.33% by the close.

the background of the south korean authorities' previous ban on stock short selling was that the south korean stock market continued to plummet, and a large number of retail investors attributed the stock market decline to short selling. therefore, the south korean regulators took action and tried to stabilize the market by introducing a policy to ban short selling.

south korea announced

on september 12, local time, south korea's top financial regulator announced that it plans to lift the ban on short selling of stocks by the end of march next year and will ensure that the necessary rule revisions are in place by then.

financial services commission chairman kim byung-hwan said the goal is to allow the strategy to apply to all stocks, not just a limited number.

previously, the financial services commission and the financial supervisory service of south korea decided to ban short selling from november last year to the end of june this year, and the borrowing of stocks for trading in the constituent stocks of the kospi 200 index and the kosdaq 150 index was prohibited. in june this year, the south korean authorities decided to extend the ban on short selling in the stock market until the end of the first quarter of 2025, and planned to impose stricter penalties on illegal stock short sellers.

according to the "short selling system improvement plan" announced by the korean authorities at the time, south korea will establish an electronic settlement system for short selling transactions, which will cut off naked short selling transactions in real time. institutional investors must establish an institutional balance management system to prevent institutions from engaging in naked short selling transactions. the korea stock exchange will also establish a "central inspection system" to conduct a comprehensive inspection of illegal short selling by institutional investors and verify the effectiveness of the balance management system within the institution.

“we are revising the law and making sure the relevant systems are in place with the goal of resuming short selling of all stocks by the end of march next year,” kim byung-hwan said on thursday at his first news conference since taking office in july.

kim further said lifting the ban on short selling would help remove one obstacle in south korea's bid to get its market upgraded by msci inc. the index provider maintained south korea's emerging market status in its annual classification review.

industry insiders have previously warned that a long-term ban on short selling of stocks may hinder south korea's stock market's efforts to be included in key global indexes.

kim byung-hwan stressed that south korea's ultimate goal is not only to win such an upgrade, but to improve the standards of south korea's capital market through measures such as the "corporate value enhancement" plan. south korean authorities have previously launched a series of stock market reform policies, including the "corporate value enhancement plan."

the financial services commission of south korea said at the time that in many areas, south korea will learn from japan's practice and launch a "corporate value enhancement plan" to eliminate the undervaluation of the korean stock market. specifically, in the "corporate value enhancement plan", companies whose management practices prioritize shareholder returns will receive "bold incentives" and tax benefits.

first, the committee will compile a "korea appreciation index" in september this year using excellent companies as samples for reference by institutions and foreign investors; second, it is expected to launch an etf tracking the index in december, providing retail investors with the opportunity to invest in excellent companies.

this "corporate value enhancement plan" is seen as an important initiative by the korean regulatory authorities to learn from the japanese market and attempt to promote "korean special valuation" in the korean market.

why is short selling prohibited?

today, major stock indices in asia-pacific rose collectively, among which the korean composite index rose 2.33% to 2572.09 points. in terms of heavyweight stocks, sk hynix rose 7.4%, posco future m rose 6.6%, posco rose 4.8%, and hyundai motor and kia motors both rose more than 3%.

judging from the market reaction, the news that the south korean authorities announced the lifting of the short-selling ban has not had a negative impact on the south korean stock market for the time being.

before this, south korea's large retail investors often blamed short selling for stock declines. therefore, whenever the south korean stock market began to fall, south korean regulators would step in to stabilize the market by banning short selling, which was a tried and tested method.

the background of the short-selling ban issued by the south korean regulatory authorities is also the continued sharp drop in the south korean stock market. in october last year, the south korean composite index fell by 7.6%, setting a record for the largest monthly decline since december 2022, and once hit a new low.

after the short-selling ban was introduced, the south korean stock market rebounded sharply, with the korea composite index rising for two consecutive months. the cumulative increases in november and december last year were 11.3% and 4.7% respectively. this round of growth continued until july this year, with the korea composite index's maximum increase during the period exceeding 27%.

since july, south korea's stock market has suffered a fierce sell-off, and the korea composite index has given up most of its gains. as of now, the index has fallen 5.34% this year, far behind other popular stock indices in emerging markets in asia-pacific, such as india's nifty 50 index, which has risen 15% this year.

currently, the forward price-to-earnings ratio of the korea composite index is only 9 times, which is lower than its historical average. therefore, the korean regulatory authorities launched the "corporate value enhancement plan" to try to learn important measures from the japanese market and improve the valuation of the korean market.

analysts believe that at this point in time, the low valuation of the korean stock market is expected to benefit from the fed's interest rate cut cycle. vikas pershad, a portfolio manager at m&g investments, said that the fed's loose policy will have a "more obvious positive impact" on the korean stock market because the korean stock market has a large proportion of technology stocks, which will benefit especially from lower borrowing costs.

baring asset management korea also believes that the fed's rate cut and the weakening of the us dollar are more like "good news", which means that investors can shift their attention to non-us assets, thereby boosting undervalued stocks in other regions.

hyun choi, the agency's head of equities in seoul, expects the kospi to reach 3,000 by the end of 2024, driven by samsung electronics, with a potential gain of about 17% from its latest closing level.