In a move that propelled South Korean markets to their best gains in over two years, financial authorities announced the extension of a short-selling ban, sending the Kospi index soaring by 5.66% and the Kosdaq index up by 7.34%. The directive, aimed at leveling the playing field for investors, will halt the short-selling of stocks until June 2024. This decision coincides with a softer-than-expected U.S. jobs report, which dampened concerns over aggressive rate hikes by the Federal Reserve.
Short-selling, the practice of selling borrowed shares with the aim of buying them back at a lower price, has been under scrutiny in South Korea, leading to a divided marketplace between institutional and retail investors. Financial Services Commission (FSC) Chairman Kim Joo-hyun expressed that the extended ban seeks to correct the imbalance, stating, "The measure is aimed at fundamentally easing 'the tilted playing field' between institutional and retail investors."
The global financial community has kept a close watch on the regulatory landscape in South Korea, especially since irregularities in short-selling practices could impact the nation's standing with major index providers like MSCI. In response to what Kim described as "unfair trades" by major foreign investment banks, the FSC has promised a stringent investigation into illegal activities, including the illicit practice of naked short-selling, which is already prohibited in the country.
While most other Asian markets were buoyed by the relaxed interest rate outlook stemming from the U.S. jobs data, South Korea's stringent stand against short-selling uniquely sparked a significant surge. Japan's market indices also experienced a rise, with the Nikkei 225 gaining 2.37% and the Topix index climbing 1.64%, marking its highest point in over a month.
Hong Kong and mainland China's markets followed suit with the Hang Seng index and the CSI 300 index seeing increases of 1.77% and 1.35%, respectively. In contrast, Australia's S&P/ASX 200 posted a modest rise of 0.28%.
The decision to extend the short-selling ban, initially lifted in May 2021 for large-cap stocks, has raised eyebrows among investors and regulators alike. The FSC's commitment to a fair market has been further reinforced by its plan to review the necessity of the ban in June 2024, based on market conditions at the time.
U.S. markets previously ended on a high note, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite registering significant weekly gains, bolstered by falling bond yields and a general easing of aggressive fiscal tightening expectations.
As regulatory eyes turn to scrutinize foreign banks' activities in South Korea, penalties have already been placed, with two Hong Kong-based banks facing fines for allegedly engaging in naked short-selling, following earlier fines on firms like Credit Suisse.
South Korea's firm stance on market fairness, along with a soft landing in U.S. job growth, has painted a picture of a cautiously optimistic market environment in the Asia-Pacific region.
