An 8-month suspension on stock short selling went into effect on Monday and will continue until next June. Financial Services Commission (FSC) announced the ban on Sunday, explaining that the move seeks to curb stock market volatility and ensure market stability and fair pricing. The decision follows the Financial Supervisory Service’s (FSS) initiative to investigate illegal short-selling activities among global investment banks dating back to May 2021. During a parliamentary audit last month, FSS Chief Lee Bok-yeon went so far as to suggest that criminal penalties might be applied to both South Korean nationals and foreigners involved, in response public outrage over unlawful short-selling.

Shortly after the FSC’s announcement on Sunday, the ROK Presidential Office said that President Yoon Suk-yeol considers illegal short selling a grave social “malady.” The immediate impact of the short-selling ban was evident when the market closed on Monday after the KOSPI soared by up to 5.7%, marking its most significant leap since March 2020 near the beginning of the pandemic. Short selling, the practice of selling borrowed stocks in hopes of profiting from a price decline, is typically seen as a means to align stock prices more closely with actual company value, thereby bolstering market confidence.

Why It Matters

The opposition Democratic Party has criticized the suspension as a “populist” policy aimed at garnering voter support ahead of the 2024 general election. The chief of the FSS, however, defended the government’s temporary suspension of short-selling, saying that the measures are aimed to “level the playing field” for retail investors. The ruling conservative People Power Party echoed this sentiment, emphasizing the policy’s role in reassuring citizens alarmed by instances of illegal short-selling by global banks, including BNP Paribas and HSBC.

However, not only progressive but also more centrist and conservative analysts and newspapers described it as “unusual” and risky to ban short selling when there is no sign of a clear economic decline owing to major external risk. South Korea previously banned stock short selling only during major global crises like the 2008 subprime mortgage crisis, the 2011 European debt crisis and the pandemic in 2020, aiming to prevent dramatic price fluctuations. A complete ban on short selling, even when temporary, also risks eroding investor confidence in the Korean stock market and hastening the outflow of foreign capital. While small stock investors may welcome the ban, the move could also compromise the conservative credentials of the ruling party and Yoon administration, which have advocated for a free market and adherence to international financial protocols.