South Korea Bans Short Selling as State-Run Funds Signal Increased Buying

South Korea banned equity short sales while the two biggest state-run funds said they may boost investments as the government seeks to shore up a market that had its biggest six-day drop in three years.

The Financial Services Commission said it will ban short selling on all shares until Nov. 9 from today. The National Pension Service, the country’s biggest investor, said yesterday it plans to buy more stocks this month than it originally targeted. Korea Teachers Pension said it purchased about 70 billion won of stocks amid the sell-off and may buy more.

South Korea joins Greece this week in banning short selling after the Kospi Index (KOSPI) slumped 17 percent in six days. The gauge reached an intraday level yesterday that was 24 percent below its May 2 record close. Domestic institutions should play a bigger role to contain volatility that is often caused by sell- offs by overseas investors, the FSC’s Chairman Kim Seok Dong told lawmakers in parliament yesterday.

“They’re trying to diminish volatility by increasing further restrictions on foreign investors,” said Gavin Parry, managing director of Parry International Trading Ltd. in Hong Kong. “What the government wants is stability, but all of these things are impediments to liquidity. Your pool has shrunk because the amount of trading participants have diminished.”

The Kospi rose 0.3 percent to 1,806.24 at the 3 p.m. close in Seoul today, after rallying as much as 4.2 percent earlier. The U.S. Standard & Poor’s 500 Index jumped the most since March 2009 yesterday as the Federal Reserve vowed to keep interest rates near zero through mid-2013.

Foreign Sales

Overseas investors have been net sellers of Korean equities since Aug. 2, divesting a net 1.28 trillion won ($1.2 billion) of Kospi equities today, according to Koscom Corp., which provides financial data from Korea Exchange. Foreign investors have sold a net 5 trillion won this year.

Short sales, in which investors bet on declines in securities by borrowing stock to sell on the expectation it can be purchased at a lower price, reached 432.5 billion won on Aug. 5, FSC data show. The daily average value in the first half of this year was 160.8 billion won.

The FSC’s Kim told lawmakers yesterday that cutting foreign investors’ portion of the nation’s equity holdings is a priority to reduce stock-market volatility. His comments came before the announcement on the ban on short selling.

“It will slow down the slump, make the investors cool down before selling the stock,” said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., which oversees about $1.5 billion. “All regulatory measures may change the magnitude but won’t change the direction.”

Naked Shorts

South Korea imposed a ban in 2008 on short sales following similar actions taken by U.S. and U.K. regulators in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Korea lifted the rule from June 2009, while keeping the ban for financial stocks. The nation already bans so-called naked short sales, where investors don’t need to borrow the shares.

Greece’s securities regulator banned short selling on the Athens exchange for two months from yesterday after the benchmark ASE Index closed at its lowest since January 1997.

Stocks globally have slumped the past two weeks as manufacturing and consumer spending data showed the U.S. economy, which accounted for 10.7 percent of South Korea’s exports last year, is slowing. Standard & Poor’s cut its rating on U.S. debt by one level to AA+ on Aug. 5, citing the failure of the political system to rein in the U.S. budget deficit.

Bear Market

South Korea will closely monitor global market movements and prepare “all policy steps needed” to help stabilize financial markets, Financial Services Commission Vice Chairman Shin Je Yoon said at a meeting in Seoul today.

The Kospi fell 19 percent from its May 2 record to yesterday amid mounting concerns the global economy is weakening. A decline of 20 percent or more signals a so-called bear market to some investors. South Korea’s industrial production expanded at the slowest pace in nine months in June, the nation’s statistics agency reported on July 29.

Bank of Korea Governor Kim Choong Soo told a parliament subcommittee yesterday that risks to the nation’s economic growth are rising in the wake of financial-market volatility. The central bank will probably hold off raising interest rates tomorrow for the second month, according to a Bloomberg News economist survey. Ten of 15 economists expect the central bank to leave its benchmark rate unchanged at 3.25 percent.

Bargain Hunting

The Kospi sank 3.6 percent yesterday to its lowest close since Sept. 9. It has fallen 12 percent this year.

“We as a long-term investor thought recent market sell- offs present good bargain-hunting opportunities over the medium- to-long-term,” Kim Seok Joo, a spokesman at National Pension, said by phone yesterday. The service, which had 340 trillion won of assets in June, is overseen by the welfare ministry.

Kospi stocks traded at 8.9 times estimated profit yesterday, the lowest level since November 2008, even as analysts forecast its companies will boost per-share earnings by 51 percent in the next 12 months, data compiled by Bloomberg show. That’s more than twice the 22 percent growth anticipated for the MSCI All-Country World Index, which measures developed and emerging-market equities.

The National Pension Service said in June it will increase the representation of domestic stocks to 19.3 percent of assets in 2012 from 18 percent planned for this year.

Trading Halts

The Kospi’s 12 percent fall this year through yesterday compares with the MSCI Emerging Markets Index’s 16 percent slide. The Kospi’s price-earnings ratio is the lowest in Asia after Pakistan’s benchmark index, data compiled by Bloomberg show. MSCI’s global index trades for 11 times, while the emerging-markets gauge is at 9.8 times.

South Korea’s Finance Minister Bahk Jae Wan asked other ministers in a meeting yesterday to bolster the market monitoring system, the ministry said in a statement. The government should try to restore market confidence, Bahk said.

Program trading on Kospi shares was stopped for five minutes in each of the past two days after Kospi 200 Index (KOSPI2) futures fell more than 5 percent for more than a minute, Korea Exchange Inc. said. Trading of shares on the Kosdaq Index, which has more than 1,000 stocks, was also halted after the index tumbled in excess of 10 percent for more than a minute, triggering automatic curbs.

Korea Teachers Pension, which is run by the Ministry of Education, Science and Technology, has room to invest 300 billion won for the rest of the year, Chief Investment Officer Lee Yun Kyu said by phone yesterday. It manages about 9.5 trillion won in assets.

“It was really a broad-based sell-off, so we plan to add evenly across sectors,” Korea Teachers’ Lee said. “I think we’re now at a bottom.”

To contact the reporters on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

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