Vice minister says market ‘excessively reacting’ toward global risks

Financial authorities on Thursday expressed concerns over increased volatility in the South Korean market and its vulnerability toward external risks.

First Vice Finance Minister Lee Eog-won vowed to adopt stabilizing measures at the appropriate time, saying the Korean market has been displaying “somewhat excessive reactions” to global risks, despite solid fundamentals.

Lee’s remark comes after the nation’s benchmark Kospi plunged below the threshold of 3,000 points Tuesday for the first time in nearly seven months. It closed at 2,962.17 points, marking the lowest closing since March 10, when it stopped at 2,958.12 points.

The index continued to hover below 3,000 points on Thursday and the Kospi closed 1.76 percent higher from the previous closing at 2,959.46. Foreign investors offloaded a net 104.5 billion won ($87.6 million) of shares, while retail investors bought a net 521.9 billion won.

Lee listed several key global catalysts that have been expanding market volatility, such as major economies’ shifts in monetary policy stance, including the US Federal Reserve’s tapering plans, heightened awareness over inflation due to disruptions in the global supply chain, the ongoing debt crisis surrounding China’s property developer Evergrande Group and the US debt ceiling negotiations.

The official hinted that the fourth quarter would be a crucial time for countering risks, with the US slated to announce data tied to employment and inflation on Friday and Oct. 13, and Evergrande Group’s next debt repayment deadline set for Monday. On top of that, the US has until Oct. 18 to decide whether or not to raise the debt ceiling and the next Federal Open Market Committee meeting is scheduled for Nov. 4.

Recently appointed Financial Services Commission Chairman Koh Seung-beom on Thursday echoed Lee’s concerns of market volatilities and highlighted the need to closely monitor the market. “The increase in market volatilities are likely to continue for some time,” he said.

But at the same time, Koh said that in view of the solid performances by local businesses and the modest recovery of the Korean economy, it would be wrong to hold overly anxious sentiments toward the market.

On the US debt ceiling issue, Hi Investment & Securities analyst Park Sang-hyun said that while it is too early to rule out a worst-case scenario, it is unlikely Republicans will continue to block the bill aimed at suspending the debt ceiling. In this sense, the Korean market would be more rattled by developments surrounding the disruptions of energy supplies in China.

“Whether the Korean market stabilizes or not would depend on Beijing’s decision to roll out measures to quell its real estate market and resolve liquidity issues following the National Day holiday,” Park said.

Meanwhile, politicians of both rival parties criticized the partial reactivation of short selling for amplifying market volatility, along with rising external economic uncertainties. The trading tactic has worsened the local stock market condition, they said.

In a Facebook statement posted Thursday, Rep. Hong Joon-pyo of the main opposition People Power Party proposed abolishing short selling of local securities, labeling it an unfair game for retail investors. Short selling is a trading tactic in which investors immediately sell stocks that they have borrowed on the belief the share price will fall in the near future. It allows investors to pocket the profit by later repurchasing the stocks and returning them to the lender.

“(Short selling) can adversely affect the stock market by dragging down indexes further. It is an ‘iniquitous practice’ that puts ‘ant warriors’ in an unfavorable condition,” he said. Ant warriors is a local term referring to active retail investors with relatively small budgets.

Rep. Kim Han-jung of the ruling Democratic Party of Korea also pointed out that the local short selling market is being dominated by foreigners, and such dominance creates an uneven playing field.

“Short selling is supposed to provide liquidity (to stabilize the market) and tackle an overheated stock market, but the most short sold stocks were shares that retail investors purchased the most,” he said. “Investors from overseas intensively shorted the shares to profit from individual investors’ losses.”

The combined value of short selling transactions made so far in October on the Kospi 200 marked about 2.16 trillion won ($1.81 billion). Except for Thursday’s 399.8 billion won, three days’ figures -- Friday’s 541.1 billion won, Tuesday’s 697 billion won and Wednesday’s 519.8 billion won -- far outpaced the amount of short selling transactions made in September, when the average daily figure came to 455.8 billion won.

Foreign investors’ short selling accounted for 72.9 percent of total short sales transactions made during the four trading sessions, while the proportion of retail short selling marked 1.9 percent. As of Wednesday, the most short sold stocks on the Kospi 200 included Samsung Electronics (133.2 billion won), Celltrion (56.9 billion won), Krafton (54.4 billion won) and KakaoBank (49.5 billion won), the data showed.

By Jung Min-kyung and Jie Ye-eun
(mkjung@heraldcorp.com) (yeeun@heraldcorp.com)