Short selling restrictions, South Korean stock market "upgrade" fails
The South Korean stock market failed to upgrade to a developed market, as the ban on short selling policy last year affected market accessibility and liquidity. The international index provider MSCI still classifies South Korea as an emerging market. The South Korean government has introduced a series of reform measures, but the ban on short selling policy has offset these efforts. The South Korean stock market will continue to remain in the MSCI Emerging Markets Index
Although Hanteo is currently thriving, the internationally renowned index compiler MSCI has once again classified South Korea as an emerging market in its latest market classification assessment, a result in line with market expectations.
Despite the efforts made by the South Korean government to enhance its market status, the recent implementation of a short selling ban has offset the effects of these positive measures.
In a statement released on Thursday, MSCI pointed out:
The recent implementation of the short selling ban has increased market access restrictions... MSCI acknowledges and welcomes recent measures proposed by South Korea aimed at improving stock market accessibility. However, it is important to note that any potential reclassification requires all issues to be addressed, reform measures to be fully implemented, and market participants to have sufficient time to comprehensively evaluate the effectiveness of these changes.
This means that South Korea will continue to remain in the MSCI Emerging Markets Index alongside economies such as China and India.
A series of reform measures previously introduced by the South Korean government had raised investor expectations that the $1.9 trillion market value of the South Korean stock market could be upgraded to a developed market. However, the decision by South Korean authorities at the end of last year to ban short selling severely impacted market accessibility and liquidity, leading to the disappointment of these expectations.
Previously reported by Wall Street News, the South Korean government announced this month that it will increase penalties for illegal activities such as naked short selling, with severe financial crimes punishable by life imprisonment. Retail and institutional investors will be subject to the same repayment terms and margin requirements to create a fair trading environment. At the same time, the short selling ban will be extended until the end of the first quarter of next year.
Each year, MSCI classifies various stock markets into developed markets, emerging markets, frontier markets, or standalone markets based on economic development, size and liquidity requirements, and market accessibility frameworks.
Prior to the market classification announcement on June 20th, MSCI released its annual market accessibility assessment report. The report indicated that South Korea had not improved in terms of accessibility ratings, and its stock short selling accessibility had decreased from "+" to "-". This marks the first market accessibility assessment conducted by MSCI since South Korea implemented a comprehensive short selling ban in November last year.
In the short term, whether Hanteo can regain MSCI's favor remains uncertain. The government and regulatory agencies face the challenge of balancing financial stability maintenance and market attractiveness enhancement. The future development of the South Korean market will depend on how policymakers respond to these complex market dynamics