World’s longest short-selling ban cited as unfavorable factor
By Park Jae-hyuk
American finance company MSCI is expected to refuse to place the Korean equity market on its watch list for potential reclassification as a developed market again this year, maintaining the country’s emerging market status for a while.
The global market index provider seems to cite the country’s ban on the short-selling of securities ― the world’s longest such ban ― that are not included in the KOSPI 200 and Kosdaq 150 indices, as one of the main reasons for rejecting the request from the Korean government and business lobby groups here to upgrade the domestic equity market to “developed” from “emerging” in its annual market reclassification next week.
“There is no timeline on the potential resumption of short-selling for the remaining securities in the Korean equity market. As such, Korea will experience a deterioration in the rating for short-selling, given that current limitations remain in place for a number of securities,” MSCI said in its global market accessibility review, June 10, two weeks before its announcement of the annual market classification review.
According to the index provider, market accessibility is one of the three criteria ― along with economic development as well as size and liquidity ― determining the classification of markets into developed, emerging, frontier and standalone.
Since Korea was first categorized as an emerging market in 1992, MSCI has mentioned its poor market accessibility ― mainly caused by the lack of an offshore currency market ― as the most significant reason for its refusal to grant developed market status to the country.
Although Korea was temporarily on the watch list for its status to be elevated between 2008 and 2014, the country has failed to return to the list since 2014, because the Korean government remained skeptical about opening an offshore currency market.
From that standpoint, the ongoing short-selling ban on small-cap stocks will make it harder for Korea to gain developed market status from MSCI.
An MSCI spokeswoman declined to comment on the issue, saying the company will share its assessment of Korea after releasing the results on June 24.
However, MSCI’s remarks in its accessibility review can be interpreted as implying its intention to keep Korea as an emerging market.
After publishing a report in May on the fact that the benchmark KOSPI will rise up to 4,035 points if MSCI classifies Korea as a developed market, the Federation of Korean Industries (FKI), the country’s lobby group representing the interests of conglomerates, sent a statement to the global index provider.
In the letter, the FKI emphasized that it is inappropriate to maintain Korea at the emerging market level, considering the size of the country’s economy, its globalized stock market and other global stock market index providers, such as Dow Jones, S&P and FTSE, which have all finished reclassifying the Korean equity market as a developed one.
It mentioned its rationale being Korea’s economic enhancements, capacity to utilize alternatives to move currency markets offshore, fairness compared to other countries, improved market accessibility for foreign investors and increased availability of stock price information, refuting MSCI’s previous claims made when it refused to classify Korea as a developed market.
FKI Vice Chairman Kwon Tae-shin said that the business lobby will provide MSCI with data on Korean companies’ exemplary efforts to fulfill environmental, social and corporate governance (ESG) criteria.
MSCI Head of ESG Research Linda-Eling Lee, however, clarified previously that its ESG indices do not override any of the rules of its market classification indices.
“The market classification follows a set of transparent rules and also a set of considerations that are really very much based on market access,” she said in a previous interview with The Korea Times in May.
Domestic analysts have warned about the short-selling ban’s negative impact on the market classification.
“If MSCI considers the Korean market to be inappropriate for investments due to the short-selling regulation, it may even remove the country from the emerging market index,” Samsung Securities analyst Kim Dong-young said.