Parochial politics, policies for domestic consumption

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Parochial politics, policies for domestic consumption

Published: 02 Apr. 2025, 00:01

Audio report: written by reporters, read by AI

Cho Min-geun

The author is the business and industry news editor at the JoongAng Ilbo.

“It’s frankly embarrassing that Korea, while claiming to pursue capital market reform, has imposed a blanket ban on short selling. If there’s criticism to be had, we’ll take it.”

That was the awkward reality facing Lee Bok-hyun, governor of Seoul's Financial Supervisory Service, at an investor relations event in Hong Kong last November. Lee had come to promote the government’s Value-up Program and attract foreign capital to the Korean market. But the only thing that the investors present wanted to talk about was the ongoing ban on short selling — already in place for a year.

“How can you claim to be advancing toward a developed capital market,” they asked, “when you ignore global standards?” At the time, Korea and Turkey were the only members of the Organisation for Economic Cooperation and Development with outright bans on short selling. Lee insisted the move had been an unavoidable choice — but even he had to concede under pressure from investors who now doubted the sincerity of Seoul's reforms.

The ban was finally lifted on March 31, a year and a half after it was imposed. Short selling, where investors borrow and sell shares in anticipation of a price drop, is a widely accepted strategy among institutional investors to hedge risk. It also plays a valuable role in market efficiency, helping to correct inflated or overheated stock prices.

But in the eyes of retail investors, short sellers are villains. Particularly in 2023, when the rapid rise of battery-related stocks was repeatedly checked by short-selling pressure, anger grew. Public petitions were filed with the National Assembly. With a general election looming, the ruling party sided with the backlash. The presidential office stepped in, citing a crackdown on “illegal short selling” to justify the sweeping measure. It was, essentially, burning down the house to swat a fly.

The fallout was predictable. Most secondary battery stocks have since been cut in half. More broadly, the Kospi gained only 8 percent during the short-selling ban — hardly impressive when compared to the nearly 30 percent surge in the U.S. S&P 500 over the same period. Foreign investors began to pull out. Their share of Korea’s total market capitalization declined sharply. Already dominated by individual investors, the market lost what little institutional depth it had. What was once called a “retail investor hell” never came close to becoming a “retail investor heaven.” Now even the retail traders are packing their bags for U.S. markets.

The screens showing the Korea Composite Stock Price Index (KOSPI), left, the foreign exchange rate between U.S. dollar and Korean won and the Korean Securities Dealers Automated Quotations (KOSDAQ) are seen at a foreign exchange dealing room in Seoul, South Korea, Monday, March 31. [AP/YONHAP]

Meanwhile, Seoul's long-sought inclusion in a developed market index has grown more elusive. Unlike emerging markets, developed markets attract larger, more stable, long-term investments. Yet MSCI, the key gatekeeper, chose to leave Korea in its Emerging Markets Index last June. One of the main reasons it cited? “Restrictions on market accessibility due to the short-selling ban.” Industry insiders say the response from global investors has grown even more skeptical. Any attempt to appeal to Korea’s economic scale or financial infrastructure is brushed aside. “A country where domestic political squabbles dictate capital market policy,” they say, “has no business being in a developed market index.”

Korea, by nature, is a small, open economy. Its high dependence on external trade and openness have always been a double-edged sword — vulnerable to shocks, yes, but also the very engine that powered its rise. That’s why Korea’s global competitiveness in not only goods and services but also in policy and governance is crucial. But “frog-in-the-well politics,” fixated on domestic votes, and “locally tailored policies” that ignore international norms, are growing more pervasive.

And short selling isn’t the only case in point. Regulatory and tax reforms needed to meet global standards have stalled. Even in the midst of a high-stakes global semiconductor race, a proposed exemption from Korea’s rigid 52-hour workweek for chip researchers was scrapped. “While rival countries offer a range of incentives and flexibility to support their industries,” lamented one industry official, “Korean lawmakers still view the labor market through the lens of the 1960s.”

Abstract financial background stock illustration. [GETTY IMAGES]

One by one, Korea’s top firms are relocating their advanced manufacturing operations to the United States and elsewhere. With the Donald Trump administration once again wielding tariffs like a weapon, domestic companies feel they have little choice. But the real problem lies at home: the country is so absorbed in its internal battles that it’s blind to how the world is shifting — and how unprepared it is to adapt.

With the Constitutional Court set to deliver its verdict on President Yoon Suk Yeol’s impeachment on Friday, the political turmoil is approaching a close. Perhaps now, at last, it’s time for Korea to look outward again.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.