IMF urges Seoul to resume short-selling

Deputy Prime Minister and Finance Minister Hong Nam-ki, left, attends an online meeting with Andreas Bauer, assistant director of the Asia and Pacific Department of the International Monetary Fund, at Government Complex Seoul, Wednesday. Courtesy of the Ministry of Economy and Finance

By Lee Kyung-min

The International Monetary Fund (IMF) has recommended the resumption of short-selling in Korea, Thursday, escalating an ongoing debate over the much-politicized issue ahead of by-elections in April.

Retail investors in Korea have been calling on the government to retain a ban on short-selling, imposed in March of 2020 to curb speculative trading amid a widening fallout from the COVID-19 pandemic. They fear that share prices could plunge upon the resumption of the investment method used by institutional and foreign investors to profit after selling borrowed shares at low prices in a bear market.

The benchmark Korea Composite Stock Price Index or KOSPI exceeded 3,000 points for the first time, Jan. 6, powered largely by retail investors who have spent the last year purchasing key large-cap stocks ― notably Samsung Electronics.

“Since financial conditions in Korea, along with market functioning following the COVID outbreak, have stabilized, we believe that conditions are in place to reinstate this practice. This decision will improve the functioning of the market, helping ensure that investors are more sensitive to risks,” Andreas Bauer, assistant director of the Asia and Pacific Department at the IMF said during an online meeting with reporters, Thursday. The hour-long press conference was held after the IMF's mission chief for Korea concluded discussions on the 2021 Article IV Mission here.

Short-selling, according to the IMF economist, is a common practice in major financial markets. It helps market participants to better manage risk-taking, although it can exacerbate volatility in circumstances where markets are strongly tilted to the downside. Suspension during such circumstances has been used in several countries, including Korea.

However, lingering concerns over retail investor protection in his view will be dealt with more effectively by enhancing consumer financial relations, supervision and market infrastructure.

“Retail investor protection is very important to level the playing field among all market participants. However an outright ban on those grounds is a very blunt instrument to address these concerns, and it has considerable costs in terms of market efficiency,” he added.

The recommendation also came on the heels of a collective move from large brokerage firms to give wider access to retail investors in borrowing shares, using funds from the Korea Securities Finance Corp. (KSFC) for trading techniques.

A dozen large brokerage firms, including Mirae Asset Daewoo, Samsung Securities and Korea Investment & Securities, are considering expanding the KSFC-mediated service previously limited to institutional and foreign investors.

“Shock waves caused by short-selling can be immense,” said Seoul National University economist Kim So-young. “Many retail investors have put their money into the stock market amid overflowing liquidity. Experiencing a shock in their investment choices is something they wouldn't want, which is a reason this is becoming a key voting issue.”

Meanwhile, the IMF Mission chief said Korea's post-pandemic policy priorities should be about tackling an uneven recovery.

“A recovery is underway, but it is uneven across sectors and households ― particularly for temporary workers and face-to-face contact service providers. Fiscal measures can and should target those who are lagging behind in the recovery. Some additional fiscal and monetary policy accommodations would help the economy normalize faster and bring discouraged workers back into the labor market, especially given the sizable economic slack and risky downsides to the recovery.”

While building a permanent safety net for the self-employed is desirable in principle, difficulties are inevitable in implementing them due to the limited availability of related data to determine the level of support, he said. The comment came in response to a question seeking his opinion on the government's move to legislate measures to protect self-employed people hit hardest by the pandemic.

“Frequent data on sales or incomes are sporadic and not easily available, so the case should be studied carefully to ensure that the measures have the desired impact and that they are fiscally sustainable.”