Korean stocks surge over 5% after gov't reinstates short-selling ban

An electronic signboard at Seoul's Hana Bank shows the benchmark KOSPI closing at 2,502.37 points, Monday, up 134.03 points or 5.66 percent from the previous session. Yonhap

Korean stocks closed up, Monday, at the highest rate in almost four years on the back of a complete ban on short-selling that was reinstated to crack down on illegal market practices by global investment banks and protect retail investors.

On Monday, the KOSPI ended at 2,502.37 points, up 5.66 percent or 134.03 points from the previous session, a day after the Financial Supervisory Commission announced an eight-month suspension of short-selling until June 2024. The 134.03 point rise is the biggest on record for the main bourse, while the 5.66 percent gain is the steepest since March 25, 2020.

The previous ban was implemented from March to September of 2020 during the coronavirus pandemic. The latest measure was aimed at preventing naked short-selling or the practice of selling stocks without actually borrowing or owning those shares.

It was the first time since Sept. 22 that the benchmark index rose above the 2,500 mark, and a sidecar trading curb was activated at one point on the junior Kosdaq bourse, which closed at 839.45, up 7.34 percent from the previous session.

Monday's rally was driven by foreign investors, who, according to the Korea Exchange (KRX), dominate the short-selling market. They accounted for 67.9 percent of cumulative short-selling in the Korean stock market so far this year.

The value of their traded shares totaled 107.63 trillion won, compared to 48.22 trillion won traded by institutional investors and 2.66 trillion won by retail investors.

Under the circumstances, foreign investors net purchased 711.1 billion won ($548.6 million) worth of shares on the KOSPI, Monday. Institutional investors net purchased 204.8 bilion won, while retail investors net sold 917.5 billion won worth of shares.

They especially went on a buying spree of secondary battery shares and hospitality industry stocks, which accounted for the lion's share of short-selling.

The buying spree reflected short covering or buying back the borrowed shares in order to return them to the lender.

Of the aforementioned shares, LG Energy Solution gained 22.76 percent, while POSCO Holdings climbed 19.18 percent and POSCO Future M increased 29.93 percent.

In the hospitality industry, Hotel Shilla advanced 5.85 percent and Lotte Tour went up 7.21 percent.

The buying spree was also witnessed on the tech-heavy Kosdaq that ticked up 7.34 percent and advanced for the fourth straight trading day.

The bourse turned volatile from the opening, and the KRX activated a five-minute sidecar curb at 9:57 a.m. A side car curb is triggered when prices fluctuate 5 percent compared to their previous close for over a minute. It took effect for the first time since June 2020.

Among the shares with double-digit gains were EcoPro BM and its parent company EcoPro, both affiliated with the secondary battery industry. EcoPro BM went up 30 percent and EcoPro increased 29.98 percent.

The Korean currency closed at 1,297.3 won per dollar, down 25.1 won from the previous day's close.

Analysts said the stock market rally, however, may be short-lived and could be followed by a massive flight of foreign capital.

They noted Korea’s latest ban can be perceived as going against international norms, considering overseas markets widely allow short-selling – a trader selling borrowed shares to buy them back at a lower price and pocket the difference.

NH Investment Securities analyst Na Jeong-hwan speculated that net purchases by foreign investors are “likely to be the dominant trend in the short term.”

Kim Dae-jun, a Korea Investment & Securities analyst, voiced a similar view, saying that the sales of short-selling-linked shares will go on in the short term as "there is a large quantity of remaining balances of the shares.”

Concerning the long-term effect of the ban on short-selling, Na remained skeptical.

“It can hinder market transparency and lower Korea’s bid to gain development market status from global index provider Morgan Stanley Capital International (MSCI),” Na said.

Speaking on condition of anonymity, an analyst at an asset management company said the ban will “make Korea a less attractive investment destination in the longer term and can result in the outflow of foreign capital as long as the ban remains in effect.”