Hurdles remain for MSCI developed market status

Finance Minister Hong Nam-ki speaks during a ministerial meeting at Government Complex in Seoul, Thursday. Yonhap

Korea seeks inclusion in watch list for MSCI developed markets index

By Lee Min-hyung

The Korean stock market still faces multiple hurdles before it can achieve developed market status from Morgan Stanley Capital International (MSCI), despite the government's much-touted bid to ease regulations on the local foreign exchange market, experts said Thursday.

Under the drive by the Ministry of Economy and Finance, Korea will ease rules on the local exchange and capital markets to place its name on the MSCI watch list by June 2022. The Korean equity market will be eligible for the much-sought-after status only a year after entering the list. The country's status may be upgraded in 2024 at the earliest under the assumption that it succeeds in gaining inclusion onto the watch list this year.

However, market experts remained pessimistic over whether the plan will proceed smoothly, as foreign investors still express a series of complaints while trading Korean stocks ― such as the partial resumption of short-selling and the limited working hours of the local foreign exchange market.

The two issues were cited by 50 global institutional investors, in a government survey conducted last November and December, as the biggest stumbling blocks that weaken their investment sentiment in Korea.

Reflecting on the findings, the finance ministry is considering plans to expand the operating hours of the foreign exchange market. For now, the Seoul foreign exchange market runs for six and a half hours from 9 a.m. onwards. The authority leaves open multiple possibilities of extending the trading hours to 6 p.m. or 1 a.m. the following day. It is also considering keeping the market open around the clock.

The move came in response to repeated requests from MSCI that the Korean government open a 24-hour offshore currency market, making it easier for foreign investors to trade the local currency. But the government remained hesitant over accepting the call, as the Korean economy is vulnerable to exchange rate volatility due to its heavy reliance on exports.

“MSCI wants Korea to keep the currency market open 24 hours a day, as most developed countries do not have strong regulations on foreign exchange transactions,” said Kim Han-soo, an economist at the Korea Capital Market Institute.

“Realistically, it is hard for the government to do so for the time being. The authority will have to take phased steps. We cannot say for sure that the Korean equity market will be included in the MSCI developed market index from a short-term viewpoint, but given the size of the economy, there is still a possibility.”

Lee Yoon-soo, an official at the Financial Services Commission, cited the regulation on short-selling as another hindrance to Korea's entry into the MSCI developed market index.

“Korea will have to be included in the watch list in June before winning the status, but to do so, we need to make noticeable improvements in the capital and foreign exchange markets here,” he said at a recent seminar. “But Korea is the only country that has restrictions on short-selling among major developed markets, which will continue to come as a major hurdle for upgrading its status.”

The government plans to keep listening to complaints from major overseas investors, and discuss detailed measures to ease rules on the local capital market. The financial ministry has been running a taskforce to improve foreign exchange policies here since last September, with a group of experts and officials from the Bank of Korea, the Korea Customs Office and the Financial Supervisory Service exchanging ideas on the agenda.