South Korea lifts short-selling ban, will foreign capital "attack" the Korean stock market?

On March 31, South Korea officially lifted its short-selling ban, marking the return of short-selling trading to the $1.17 trillion South Korean stock market after a 17-month hiatus.

Amid ongoing tariff concerns (with Trump set to announce a new round of tariff policies raising market worries) and the lifting of the short-selling ban, the South Korean stock market experienced significant volatility today, with the KOSPI index opening sharply lower and hitting a maximum intraday decline of over 3%, led by sectors such as automobiles and semiconductors.

As of the time of writing, the KOSPI index in South Korea is down 2.96%, Hyundai Motor is down 3.63%, Samsung Electronics is down 3.24%, LG Energy is down 6.6%, and SK Hynix is down 3.81%.

Since the global financial crisis in 2008, South Korea has implemented short-selling restrictions multiple times.

During the 2008 financial crisis, South Korea, like the United States and the United Kingdom, suspended short-selling trading; in March 2020, in response to the market crash triggered by the COVID-19 pandemic, South Korea again imposed a comprehensive ban on short-selling.

The most recent short-selling ban in South Korea began in November 2023, when regulators sought to address market fairness issues and crack down on illegal activities known as "naked short-selling."

South Korean regulators investigated and fined several international investment banks involved in such activities while introducing an electronic monitoring platform to help identify illegal trades.

Why Lift the Short-Selling Ban?

Kim Byoung-hwan, chairman of the South Korean Financial Services Commission, stated in February this year that fully restoring short-selling trading rather than partially lifting the ban is necessary, as lifting the ban on short-selling is an essential path to enhance market efficiency and integrate into the global capital system.

"Regulators have revised the maximum borrowing period for investors to lend stocks for short-selling, applying the same standards to retail and professional investors. At the same time, harsher penalties for illegal trading have been implemented, with a maximum sentence of life imprisonment."

Additionally, the South Korean exchange will manage a centralized monitoring platform designed to identify trades that short-sell without first borrowing the stocks. If sell orders do not match the outstanding balance, the trades will be automatically reported to authorities.

It is understood that the South Korean exchange has also optimized the trading mechanism, extending trading hours from 6.5 hours to 12 hours (from 8 AM to 8 PM) and gradually introducing trading for 800 stocks.

The South Korean exchange has introduced pre-market and after-hours trading mechanisms, reducing trading costs by 20%-40%, which not only enhances market activity but also attracts foreign investment.

Will Foreign Capital "Kill" Back into the South Korean Stock Market?

Although foreign capital is expected to increase its holdings of South Korean stocks in 2024 due to government efforts to boost shareholder returns, the South Korean market has seen foreign capital outflows this year due to political uncertainty and U.S. tariff risks.

However, the end of the short-selling ban may attract foreign capital inflows. According to media reports, from the end of August 2024 to March 2025, global funds sold nearly $20 billion worth of South Korean stocks amid political turmoil and tariff uncertainties in South Korea Pictet Asset Management stated in February:

Once short selling is allowed to hedge long stock positions, it plans to purchase more South Korean stocks.

The return of international investors may trigger a revival in convertible bond issuance. The issuance of these corporate bonds significantly decreased during the short selling ban, especially for dollar-denominated convertible bonds.

These bonds are popular in global arbitrage trading, where investors buy the bonds while shorting the related stocks. A recovery in the convertible bond market will provide companies with a cheaper financing channel, as the coupon rates of these bonds are often lower than those of traditional bonds.

Most importantly, the resumption of short selling may provide a key boost for South Korea to attract global investors: being upgraded to developed market status by MSCI.

The index provider stated in its annual review in June 2024:

South Korea's short selling ban is a limiting factor for market access. Removing this barrier may ultimately allow South Korea to join the club of mature markets.

Now that South Korea has lifted the short selling ban, it is expected to provide more support for the inclusion of the South Korean market in the MSCI developed market index.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at their own risk