Korean markets likened to enigma, more obscure than China: report

Korea's bid to gain developed market status in the Morgan Stanley Capital International (MSCI) global index was once again thwarted this year.

A trader works at the Hana Bank trading room in central Seoul on July 1, the first day of the won-dollar trading hour extension. [YONHAP]

[NEWS ANALYSIS]

Foreign investors still believe the Korean stock market lacks transparency even compared to China, according to a report based on a survey of 45 foreign investors, as the country’s bid to gain developed market status in the Morgan Stanley Capital International (MSCI) global index was once again thwarted this year.

The obscure trading rules and the extended ban on stock short trading were cited as key obstacles clogging the capital inflow, wrote Choi Soon-yeong, a research fellow at the Korea Capital Market Institute, in his report published on June 28.

"The most imminent issue in the Korean stock market is [the lack of] clear trading guidelines," said an unnamed market maker according to the report, noting that "even China is well-versed in these aspects."

Choi interviewed 45 traders at 15 global financial institutions, most of which are involved in the MSCI market classification consultation, about foreign investors’ perception of the market accessibility in Korea.

Despite being on par with developed economies in size and stability, the Korean stock market “lags behind the advanced markets in terms of the convenience and efficiency of investments for foreign traders,” said Choi.

"In particular, the lack of clear guidelines on [what constitutes] abnormal trading was pointed out as an issue,” the researcher said, adding that the interviewees "also pointed to the lack of proactive and reactive investigation processes regarding warning or sanctioning abnormal trading practices."

Moreover, foreign investors stressed that Korea needs to improve its stock short trading system to “enhance market flexibility.”

The Korean government temporarily banned stock short trading in November last year after authorities uncovered illegal short-selling by global investment firms. The ban, initially set to be lifted last year, has been extended through March next year, as President Yoon Suk Yeol called for a thorough monitoring system to prevent illegal practices.

Some interviewees criticized the current short-selling system, finding it excessively regulated and inflexible, especially regarding naked short-selling, an illegal practice in Korea.

MSCI also cited the current short-selling ban for Korea's “emerging market” classification in its Global Market Accessibility Review, announced on June 20, marking the suspension as a “deterioration” in market conditions.

While MSCI noted that English information disclosure has improved and the government has implemented measures to enhance market accessibility, including the extended on-shore won-dollar trading hours, it decided it is still too early to determine the full impact of the newly implemented measures and that the information is “not always readily available for all companies.”

The upgrade to developed market status is seen as essential for enhancing capital inflow, contributing to market stability.

In its “dynamic” economy road map, announced on Wednesday, Korea declared that it will bump up its stock valuation to match the past 10-year average of the developed markets in the MSCI global index until 2035.

The plan potentially includes enabling around-the-clock foreign currency trading and facilitating won transactions for foreigners’ domestic investments by 2027 to enhance market accessibility.

To incentivize companies to improve shareholder return policy, which has also been criticized as one of the factors discouraging foreign investors from Korean securities, the government outlined its plan to cut inheritance taxes and provide corporate tax incentives in line with the increase in shareholder returns, such as dividend payouts and the cancellation of treasury stocks.

However, some government plans need legislative revision, meaning that the Yoon administration needs to seek cooperation from the liberal Democratic Party (DP)-controlled National Assembly.

“It is difficult to be optimistic about the legislature’s approval, as the accelerating conflict between the People Power Party and the DP is a problem, while the [inheritance tax] revision is an especially fiercely contested issue between the parties,” said Ko Gyeong-beom, an analyst at Yuanta Research.

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