South Korea's KOSPI index surged to a four-year high on Monday, following the Financial Supervisory Commission's decision to extend an eight-month ban on naked short-selling until June 2024. The rally was spearheaded by foreign investors, who account for 67.9% of this year's cumulative short-selling, resulting in a net buying of over 500 billion won ($385 million) on the KOSPI. The buying spree was partly due to short covering, pushing the KOSPI above the 2,500 mark for the first time since September 22.
Secondary battery shares and hospitality stocks saw significant gains, leading to a five-minute sidecar curb on the Kosdaq due to price volatility. Notable gainers included LG Energy Solution, POSCO (NYSE:PKX) Holdings, POSCO Future M, Hotel Shilla, Lotte Tour, EcoPro BM, and EcoPro.
The value of traded shares by foreign investors reached 107.63 trillion won, compared to 48.22 trillion won by institutional investors and 2.66 trillion won by retail investors. However, analysts warn of potential short-lived rallies and massive foreign capital flight due to Korea's ban on short selling being perceived as against international norms. This could impact Korea’s bid for development market status from Morgan Stanley (NYSE:MS) Capital International (MSCI).
The decision to fully ban short selling by the first half of next year was influenced by previous financial crises including the global financial crisis, European sovereign debt crisis, and COVID-19 pandemic. This ban has been criticized by domestic retail investors for moral hazards and market disruption caused by powerful foreign investors known as "black-haired foreigners" using YouTube channels to spread negative signals.
The KOSDAQ also experienced a surge following this announcement, increasing to 839.45 points. Secondary battery companies Kumyang, POSCO Future M, Ecopro BM, and Ecopro saw their stock prices hit the maximum daily limit of ±30 percent. This led to a temporary trading halt on the KOSDAQ for the first time in over three years. The won-dollar exchange rate closed at 1,297.3 won per dollar.
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