The Ruling Party Seeks to Extend the Ban on Short Selling for Fear of Losing the Support of the "Donghak Ants"

[경향신문]
Politicians are asking to extend the ban on the short selling of stocks, temporarily implemented to tame the economic crisis triggered by COVID-19, as the ban will only be effective for two more months. The nation has witnessed the KOSPI index surpass 3,000 for the first time in history, and the swarm of individual investors referred to as the “Donghak Ants” are rushing to the stock exchange. This has led politicians to oppose short selling due to “concerns of losses suffered by individual investors.” The ruling party, whose approval rating crashed after its real estate policies backfired, thinks of the stock market as a gauge reflecting public sentiment, and experts claim that the ruling party is trying to actively extend the ban as in the previous two occasions last year.

Yang Hyang-ja, a member of the Democratic Party of Korea’s Supreme Council appeared in an interview on YTN radio on January 12 and called for the need to extend the ban saying, “There is a burden on the Donghak Ants, who are leading our nation at present. We need to ease that burden.” Democratic Party lawmaker Park Yong-jin, who is on the National Policy Committee, also wrote on social media, “It is the Donghak Ant, who sheds bitter tears, due to the short selling policy, a slanted ground ridden with holes.” He also wrote, “Resuming short selling without correcting the unfairness and institutional problems is neglecting the responsibility of a financial authority.”

Short selling occurs when an investor borrows a security and sells it with the intent to rebuy the security at a cheaper price. The investor aims to make a profit from a drop in the security’s price and pay for the borrowed security. It plays a positive role, for it can prevent the value of exaggerated stock prices from soaring, but since it is difficult for individual investors to actually engage in short selling, it is regarded as a policy that works to the advantage of foreign and institutional investors.

Last February, when stock prices crashed amidst the first wave of the novel coronavirus, the Financial Services Commission banned short selling for six months to prevent chaos in the financial market. The commission extended the ban again in September until March 15, 2021. However, the previous day, the Financial Services Commission announced plans to permit short selling.

The request to extend the ban on short selling is mainly being voiced from the ruling party, and politicians believe the ruling party’s efforts to secure public support has shifted from the real estate market to the stock market. This is because money from the pockets of ordinary citizens, who felt left out when housing prices rose, has flowed to the stock market in an unprecedented level. The Democratic Party, which lost public support due to ineffective real estate policies, may be trying to make up for their mistakes by protecting the stock market. In fact, last year, each time the commission extended the ban, Democratic Party lawmakers represented the voices of the individual investors and called for the extension. In the parliamentary session last December, lawmakers also passed an amendment strengthening punishment on illegal short selling.