The South Korean stock market has rallied over 110% year-to-date, standing out as one of the top performers among major global bourses. Yet, in its latest classification review, MSCI decided to maintain South Korea's emerging market status, leaving it off the developed market watch list. This indicates that the Korean capital market must still clear significant hurdles to achieve an upgrade.
The CEO of MSCI recently highlighted that while South Korea undoubtedly possesses the characteristics of a developed economy in terms of GDP, technological prowess, and social development—even regarded as one of the world's most advanced markets—the core of the index provider's assessment lies in the stock market's trading mechanisms and investment accessibility. In terms of capital market maturity, South Korea currently retains many attributes typical of emerging markets.
The most significant barrier hindering South Korea's upgrade lies in the Korean won trading market. In mature developed market systems, international investors can typically freely trade local currencies around the clock across major global financial centers to execute stock transactions. In contrast, South Korea currently permits won trading only during local Seoul trading hours. For index funds managing approximately one-third of global assets, this restriction creates significant inconvenience for portfolio adjustments, making it difficult for fund managers to efficiently execute currency conversions and asset rebalancing outside of trading hours.
To promote market reform, South Korea plans to launch a 24-hour USD/KRW spot trading mechanism starting July 6, aiming to meet international investor demand. However, MSCI remains skeptical, believing that merely extending trading hours may not fully resolve the issue. The institution is primarily concerned with whether sufficient market liquidity can be generated during overseas trading sessions—specifically, whether the market maintains adequate trading volume and reasonable bid-ask spreads during non-core hours such as early morning.
Beyond foreign exchange market restrictions, the South Korean capital market faces multiple institutional barriers. Complex investor identity verification processes, restrictions on physical asset transfers and over-the-counter trading, and exchange data usage rules constraining the development of certain investment products are all focal points for international investors. Although South Korea has continued to push reforms in recent years, the market generally believes that these issues have not yet been fundamentally resolved.
Despite failing to secure MSCI's developed market classification, the South Korean stock market has remained robust over the past two years. Earlier this year, the total market capitalization of the Korea Composite Stock Price Index (KOSPI) surpassed that of the UK's FTSE 100, making it the eighth-largest national stock market globally by market cap. Currently, another international index provider, FTSE Russell, has already classified South Korea as a developed market. However, MSCI's rating directly influences the allocation of significant international capital tracking its indices. Market observers believe that if South Korea can further refine its foreign exchange trading system, enhance market liquidity, and deepen capital market reforms in the future, the possibility of inclusion in MSCI's developed market category remains.
