[THE INVESTOR] South Korea is not likely to get its stock market included in the Morgan Stanley Capital International’s Developed Markets in the long run, as the financial authority remains unchanged over its currency exchange regulations, financial regulators and analysts said.

The MSCI announced Tuesday in New York that the global index provider will not include Korea on its “review list” for potential reclassification of its stock market to advanced status at least until after 2017.

“The recent changes announced by the Financial Services Commission in South Korea will not take effect until 2017 and the investment frictions related to the lack of convertibility of the Korean won and restrictions imposed by the local stock exchange on the use of exchange data for the creation of financial products remain unaddressed,” the MSCI said in a press statement.

Although Korea has moved to extend its stock trading hours and introduce the “omnibus account system,” enabling foreign investors to open a single consolidated account for stock investment, it remains adamant in its opposition to allowing offshore currency exchange.

Due to this prolonged regulatory issue over the Korean won convertibility, the Seoul stock market has failed to elevate its status from emerging to developed market since 2008.

Financial regulators have repeatedly said this is something it cannot deregulate and allow the won to be converted freely to other currencies overseas, otherwise, the export-dependent economy would face instability and volatility on the foreign exchange market.

“Our country is small, yet open, and trade is a large part of the economy. Maintaining stability in the foreign exchange market is important,” said Jeong Eun-bo, vice chairman of the FSC, in a meeting.

“Allowing an offshore currency exchange that can fundamentally change the country’s foreign exchange management system is something we cannot pursue in the short-term,” he added.

The FSC said in a press statement Wednesday that it, however, will seek to advance its forex market by extending the trading hours in Korea, and establish a Korean won-Chinese yuan exchange center in Shanghai.

The newly introduced omnibus account system allowing stock trading via a single account instead of multiple accounts for transactions and settlements will be fully launched in 2017, the FSC said.

“The regulator is actively considering further launching this account system for derivatives and bond trading,” it added

The MSCI has delayed the inclusion of Chinese A shares into the Emerging Markets Index, despite the Chinese regulator making “significant steps” in addressing global investors’ concerns.

“They demonstrate a clear commitment by the Chinese authorities to bring the accessibility of the China A shares market closer to international standards. We look forward to the continuation of policy momentum in addressing the remaining accessibility issues,” said Remy Briand, MSCI managing director, in a statement.

Analysts say it is only a matter of time until China’s A shares can be included given China’s growing presence in international finance, which could further overshadow Korean stocks.

“It is a negative surprise, but we believe every delay increases the probability of a positive decision at the next review, which may happen before next June,” said Steven Sun, head of China equity research of HSBC Global Research.

Last November, foreign investors sold off Korean shares to the tune of 538.2 billion won ($458.5 million) when the MSCI included the first batch of Chinese American depositary receipts in the emerging market index. The KOSPI fell to around 1,920 at that time.

By Park Hyong-ki (hkp@heraldcorp.com)