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A Short-Selling Ban Makes Perfect Sense

Shuli Ren

(Bloomberg Opinion) -- Markets dominated by companies sensitive to global business cycles may have little choice when investors start to use them as a proxy for general pessimism. In that light, South Korea’s measure to ban short selling for six months, the first such restriction since 2011, isn’t as rash as it might seem.

The coronavirus outbreak came at the worst time for President Moon Jae-in. Only a few months ago, the Kospi Index finally came out of a deep bear market, characterized by steep conglomerate discounts and historically low trading turnover. Then the virus hit, hammering the benchmark index right back into bear territory. On a two-, five- and 10-year horizon, Korea’s stock market has consistently underperformed its north Asian peers of China, Japan and Taiwan.

Moon may feel that he is doing a good job controlling the outbreak. He quickly unveiled an extra $9.8 billion budget to fight a virus-induced slowdown, and Korea’s less draconian, tech-savvy containment measures have been lauded by health experts.

But his good efforts aren’t being rewarded by investors. On Friday, the Kospi hit its first circuit breaker since Sept. 11, 2001, which prompted the short-selling ban.

When conventional methods fail, market-unfriendly ones become the next step. With investors animated and frantically trading, the case for restrictions on short selling is much stronger now than, say, last summer’s slow downward grind.

If there’s one lesson we have learned from the global financial crisis, it’s that global economic growth is hard to come by. Lower productivity aside, we’ve had unpleasant shocks beyond the coronavirus, from the U.S.-China trade war to an oil-price crash.

As a result, industrial behemoths such as Samsung Electronics Co. and SK Hynix Inc., which rely on the global supply chain, get dumped first in a market meltdown. And when you think of companies listed in Seoul, it’s just these sorts of export machines that dominate.

Earlier in the year, foreigners were still net buyers of Korean stocks, cheered that memory-chip prices had stabilized, and by prospects that oversupply would finally meet increasing demand. The coronavirus changed the calculus entirely. Since late January, foreigners net sold $8.3 billion of Korean stocks, cashing out about $4.3 billion from Samsung and another $800 million from Hynix.

Even if a government is doing everything right, sentiment toward its stock market may not go in lockstep. Given the Kospi’s cyclical nature, the world might just be coming out of a recession when the six-month ban ends, and will look at Korea fondly once again.The Bank of Korea said Friday it was considering an emergency meeting. But as we’ve seen in U.S. stock futures’ reaction to the Federal Reserve’s daring rate cuts and quantitative-easing relaunch, conventional policy methods fail to inspire market confidence in the face of the coronavirus.

Ultimately, some blame still lies at the feet of the Moon administration for failing to transform market structure fast enough. Chaebol reform, Moon’s ambitious campaign promise to untangle Korea's web of conglomerates, has stalled. The dominance of these companies hamper Korea Inc.’s will and ability to innovate, leading to a dearth of unicorns needed to freshen up the Kospi. Instead, we’re left with Samsung, which earns 85% of its sales overseas and has seen its operations slow because of the virus. In recent weeks, Vietnam’s quarantine of South Korean arrivals kept engineers from reaching its mega factories there.

If Americans are lamenting the end of the S&P 500’s bull run, Koreans must be wondering if their stock market can ever recover. As we’ve learned from the collapse of Lehman Brothers Holdings Inc., a cyclical market isn’t a healthy one.

To contact the author of this story: Shuli Ren at sren38@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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