Regulator takes steps to tackle 'Korea discount'

Korea's financial regulator is determined to combat illegal short selling to address the undervaluation of stocks, known as the "Korea discount."

Financial Services Commission Vice Chairman Kim So-young speaks during a foreign press conference held on Friday in central Seoul. [YONHAP]

Korea’s financial regulator is adamant on rooting illegal short sales out of the market in order to tackle the chronic underpricing of stocks, or the so-called “Korea discount,” its vice chairman said.

“There are many reasons that contributed to the ‘Korea discount,’ and illegal short selling is one of those,” said Financial Services Commission (FSC) Vice Chairman Kim So-young during a foreign press conference held on Friday in central Seoul.

“Korea discount” refers to the overall underpricing of Korean stocks compared to those of peers outside the country, which is often considered to have been caused by weak shareholder returns and geopolitical risks in the region.

The Yoon Suk Yeol administration has recently imposed a temporary ban on short selling that will run through next June. The curbs followed the FSC's identification of large-scale naked short sales by two global investment banks. The president called for “fundamental improvements” to be made to the market system during a Cabinet meeting in November.

Naked short selling, the practice of short selling a tradable asset without first borrowing the asset, is illegal in Korea. And with the general election coming up in April next year, the short sale ban is widely perceived as an attempt to further rally investors.

Kim, however, said that the primary motive behind the latest decision is to create an advanced market in the long run by eradicating illegal practices.

“In a market that is matured and advanced enough, like in the United States, short sales will play many positive roles. But [in Korea’s case] the market is still far from mature and we believe illegal short-selling practices have been rampant at this point,” said Kim.

During the press conference, Kim stressed that “the government is more serious than ever about improving the capital market system.”

The vice chairman cited establishing market discipline, strengthening the role of the capital market in the economy, and stabilizing the financial environment as three pillars of the Yoon administration’s capital market policy.

“The capital market’s weaker performance compared to the country’s economic growth may impede Korea from attracting enough capital, which may result in reduced growth potential of the real economy,” Kim said, promising further policy reforms to alleviate the Korea discount.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]