Korea's MSCI inclusion faces setback due to extended short selling ban
Korea's inclusion in the Morgan Stanley Capital International Index (MSCI) as a developed country is likely to be unsuccessful once again following the extension of the short selling ban until next March, according to analysts, Friday.
"Given that nearly all developed countries around the world allow short selling, Korea's decision to continue to ban short selling is way out of the norm, resulting in no change in classification for Korea in terms of the MSCI index," said Douglas Kim, an analyst at Smartkarma, a Singapore-based investment research firm.
MSCI is an investment benchmark that measures the performance of equity markets across countries. It divides markets into developed, emerging, frontier and standalone categories. The evaluation criteria include the country's level of economic development, size and liquidity requirements, and market accessibility.
MSCI has evaluated Korea's market accessibility as low, thereby classifying the country as an emerging market.
If MSCI includes Korea in its developed market list, $36 billion of foreign capital is expected to flow into the country, according to the Korea Capital Market Institute. The government has been making efforts to meet the conditions, such as improving the structure of its foreign exchange market.
Financial Supervisory Commission (FSC) Vice Chairman Kim So-young speaks during a press briefing at the Government Complex in Seoul, Thursday. Courtesy of FSC
On June 21, the MSCI will announce the long-awaited market classification results.
However, the inclusion seems unlikely as the government has extended the short selling ban until next March. The government banned short selling for all listed stocks since November 2023 after detecting a series of illegal short selling activities by global investment banks operating in Korea.
On June 6 (local time), MSCI evaluated that Korea's market accessibility had deteriorated following the ban. Korea's rating shifted from a plus (+), indicating no issues and possible improvement, to a minus (-), indicating that improvement is needed.
The market believes that discussions on developed market inclusion can only begin after the resumption of short selling.
"MSCI's position is that despite our system improvements, a fully established system and an evaluation period of at least one year are required," Korea Investment & Securities analyst Yeom Dong-chan said.
Amid concerns, the government stated that it prioritizes improving the short selling system over MSCI inclusion. It also mentioned that it has communicated sufficiently with foreign investors and expects the risk of capital outflows from the domestic stock market to be minimal.
"While being included in the MSCI's developed market would be beneficial, it is not our primary policy goal. The likelihood of inclusion will increase once system improvements eliminate illegal short selling and establish a fair and transparent market order," Financial Services Commission (FSC) Vice Chairman Kim So-young said during a press briefing on Thursday.
Kim explained that an additional extension of the ban was necessary to set up a central computerized system to monitor and prevent illegal short selling practices.