The Korea Herald


[KH Explains] Why foreign investors continue to be net buyers despite short selling ban

Foreign nationals pick up W2.62tr of Kospi shares over past month, with Samsung, SK hynix as top picks

By Im Eun-byel

Published : Dec. 3, 2023 - 15:37

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An electronic board shows the nation's benchmark Kospi as it closes at 2,505.01 points Friday, at Hana Bank in Seoul. (Yonhap) An electronic board shows the nation's benchmark Kospi as it closes at 2,505.01 points Friday, at Hana Bank in Seoul. (Yonhap)

Contrary to concerns that the short selling ban would lead to an exodus of foreign funds, offshore investments have flooded into Korea over the past month backed by dovish expectations on US interest rates and a chip recovery.

Last month, financial authorities in Korea announced a complete ban on short selling from Nov. 6 until the end of June 2024, in a bid to ensure a "fair playing field" for investors.

While market watchers predicted that implementing a short selling ban would drive away foreign investors as it limits liquidity in the market, data from the Korea Exchange, Korea’s sole bourse operator, shows foreign funds have continued to flow in.

Foreign investors bought a net total of 2.62 trillion won ($2.01 billion) on Kospi, Korea’s main bourse between Nov. 6 and Friday, marking a sharp contrast to a net selling stance shown for four months from June to September. On Kosdaq, the secondary bourse, the net buying amount in the same period stood at 1.04 trillion won.

“A short selling ban does not directly impact the foreign fund flow or share price fluctuations. The practice is merely a way of providing liquidity for the market,” said Sung Tae-yoon, an economics professor at Yonsei University.

“The recent inflow of foreign investments stems from mounting expectations on the US Federal Reserve losing its grip on key interest rates,” Sung explained.

In addition, investors are buoyed by the outlook on the local chip industry. Korea's chip exports rebounded in November, rising 12.9 percent on-year to $9.5 billion, ending 15 months of decline, data from the Ministry of Trade, Industry and Energy showed Friday.

As figures show the semiconductor industry has passed the bottom of its dip, foreign investors are increasing their stake in big-name tech giants, including Samsung Electronics and SK hynix.

From Nov. 6 to Friday, foreign investors net bought 1.7 trillion won worth of Samsung Electronics shares, accounting for nearly half of the total net purchasing amount. SK hynix followed the list with 531 billion won net buying from foreign hands.

Though foreign investors are betting higher on the Korean stock market, market watchers deem chances have become thinner in the likeliness of Korea moving up a rank on the Morgan Stanley Capital International index from an emerging market to a developed market.

While index operator Morgan Stanley has pointed out Korea’s lack of schedule to normalize the short selling regulations as a reason behind the reclassification failure, the recent complete ban has made the policy stance even murkier.

The ban is set to last until June for the time being, but the authorities have not yet confirmed when it will be lifted, saying they need to consider how the system can be improved.

“What is worse than the short selling ban itself is policy inconsistency. If authorities continue to flip-flop over the short selling, this will lead to confusion, further lowering the chances of the index upgrade,” a market researcher who wished to remain anonymous said. "Stability of institutional framework would be a prerequisite for an MSCI upgrade."

Yet, professor Sung remained hopeful that the short selling ban could normalize the stock market by blocking out "unfair practices," such as unequal rules on trading for retail and institutional investors, improving the overall market condition in the end. Authorities said the complete ban was prompted by cases of illegal naked short selling.

“A complete prohibition of short selling, of course, does not comply with ‘global standards,’” Sung said. “But the numbers are showing foreign investors are putting greater importance on market integrity, evaluating the performance of listed companies and whether the capital market could truly reflect the performances."