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Short selling key for Korea’s global index goal, says bourse CEO

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South Korea needs to take the politically sensitive step of fully lifting curbs on stock short selling to ensure inclusion in a key global index, the head of the country’s securities exchange said.
Asia’s sixth-largest equity market is seeking to be upgraded in MSCI Inc.’s equity gauge to developed status from emerging, part of efforts to revitalise the sector by attracting more overseas funds. The index provider has called on Korea to improve access for foreign investors and has said restrictions on short selling are an obstacle to that.
“We need to resume short selling completely. It should be a plus factor for our inclusion in the developed market status,” Sohn Byung Doo, chief executive officer of Korea Exchange, said.  “But this issue is so political. That’s why the government needs some rationale to persuade the public better.”
While it’s government that will decide on whether to bring back all short-selling, Sohn’s remarks may carry weight as leader of Korea’s sole exchange operator.
Korea curbed sales of borrowed stocks during the pandemic to reduce market volatility, and now only allows those trades for large-cap shares on the Kospi 200 and Kosdaq 150 indexes. The government is cautious about fully ending restrictions due to opposition from the increasingly politically influential masses of retail investors.
Korea has been trying for years to get its shares and bonds included in global indexes, to lure foreign investors who can help drive growth in a major economy weighed down by the world’s fastest-aging population. But policymakers will likely find it difficult to convince Korea’s 14 million individual equity traders that fully allowing short selling again wouldn’t trigger a heavy selloff as the investors fear.
The CEO said he tries to explain to short-selling critics the rationale for doing those trades, explaining that it’s a “proper way of investing” to sell shares that one doesn’t own. Sohn, who was appointed as Korea Exchange’s CEO in 2020 after working for about three decades in nation’s finance ministry and financial regulator, said the growth of retail investor base has also helped improve minority shareholder rights.
Korea, which is in MSCI’s emerging-market category along with China, Taiwan and India, has missed opportunities in the past to get into the developed-market index. It was dropped from the MSCI’s watch list for an upgrade in 2014 due to restrictions on won trading and limited access for foreign investors.

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