(Bloomberg) -- South Korea is determined to end a perennial discount of its stock market and create a system that encourages retail investors and companies to rely on equities to raise wealth and capital, the country’s top financial regulator said. 

The government’s efforts to enhance corporate valuation will help cushion the financial impact from problems including aging and slowing growth, Financial Services Commission Vice Chairman Kim Soyoung said in an interview on Tuesday. The country’s largest companies, or chaebols, are on board with the initiative and the government is considering easing taxes on dividend income as part of its drive to upgrade capital markets, he added. 

“The public can create wealth through assets so it helps the aging society while companies can raise capital from the stock market to invest, which helps the slowing economy,” Kim said in his first media interview since joining the financial regulator in 2022. “We are aiming to create a stock market that can rally over the mid-to-long term.”

South Korea unveiled the “Corporate Value-up Program” last month in an ambitious bid to boost depressed valuations. The much-anticipated plan, however, fell short of investor expectations with a lack of penalties and vague references to incentives. Kim’s comments offer a peek into details the regulator has promised to offer and a reassurance that policy efforts will continue. 

The benchmark Kospi Index, which rallied in the run-up to the Feb. 26 release, has largely moved sideways since then. The government is seeking to emulate the success seen in Japan, where a name-and-shame policy has nudged companies to take concrete steps to boost profit and return more to shareholders. 

Read: What’s The ‘Korea Discount’ and Why Is It a Problem?: QuickTake

Short-Selling Ban 

South Korea will consider the progress in its system to better monitor short-selling activities and financial market conditions before deciding whether the ban can be lifted at the end of June, said Kim, formerly a professor of economics at Seoul National University. 

The government imposed a blanket ban on short selling in November, a surprise move that critics said was aimed at catering to retail investors ahead of the April parliamentary elections. Back then, Kim defended the decision citing a need to root out “rampant” illegal trading that has hurt trust in the market.  

“Whether we can resume right after June depends on how much progress we make in improving the current system and also on market conditions at the time — although the likelihood of financial market instability is low,” Kim said. “There have been illegal short sellers who were illegally shorting not just once but continuously for more than a year. Under the existing system, there was no way we could uncover them.”

As to arguments that the ban on short selling — seen a common market practice in most countries — may further hamper Korea’s efforts to win an upgrade to developed market status by MSCI Inc., Kim said the efforts will ultimately pay off.

“If we resume short selling after completing making improvements in the current system, I think the market will become more advanced and it won’t be a minus factor in the MSCI’s review,” he said. The government wants to ensure that companies adopt real-time monitoring of the outstanding balance of borrowed shares before lifting the curbs, according to Kim.

“We need a system where illegal short selling can be caught even after it has already happened,” Kim said.

Read: Why South Korea Banned Short Selling and What’s Next: QuickTake

Other key comments by Kim in the wide-ranging interview include: 

  • Being included in the MSCI developed market list won’t be bad for the country “but our goal is not the inclusion but advancing the capital market and resolving the Korea Discount. In the process, we expect that we will certainly be included” in the list
  • Banks should add more innovative businesses in addition to their traditional operations, and authorities have been encouraging banks to seek more profit overseas
  • There has been an increase in non-bank financial firms’ investment in real estate overseas and at home. Authorities are closely monitoring as there can be systematic risks during the refinancing process and also because they are heavily leveraged
  • “We don’t see high chance of systematic risks” from property investment at home or overseas but individual firms may suffer losses

--With assistance from Madeleine Lim, Kazunori Takada and Emily Yamamoto.

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