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2 ASIA HAND Vietnam has
second thoughts about WTO By
Shawn W Crispin
Less than two months after
formally acceding to the World Trade Organization
(WTO), Vietnam's Communist Party leaders already
appear to be having second thoughts about their
new global commitments to more foreign investment
and financial openness.
Vietnam's leaders
are grappling with how best to manage foreign and
domestic speculation on the country's
under-regulated formal
and informal stock
exchanges, which have in recent months channeled a
massive influx of US dollars into the economy.
Vietnam's bourse has rallied strongly,
skyrocketing 144% last year and accelerating an
additional 44% so far this year.
Foreign
investors have plowed mainly into the small and
illiquid equity market's top 10 listed stocks, as
well as over-the-counter bank and pharmaceuticals
shares, where foreign-led merger-and-acquisition
activity is expected to pick up, according to
VinaCapital, a local investment bank.
The
market euphoria has local financial authorities in
a funk. That's partly because huge capital inflows
have limited the central bank's monetary-policy
options to manage inflation and is also starting
to put severe strains on its local-currency peg.
To signal that the government might act, Vu Bang,
chairman of the State Securities Commission, the
stock-exchange regulator, has on at least one
occasion urged investors to exercise "caution".
Last week, Permanent Deputy Prime Minister
Nguyen Sinh Hung, a former finance minister,
acknowledged that the market is "concerned that we
will introduce some limits", according to press
reports. To curb speculation, the government has
already delayed plans to increase the current 49%
cap on foreign share ownership and has imposed new
restrictions against stock lending by local banks.
Those measures, however, have to date largely
failed to dampen the rally.
There are now
growing indications that the State Bank of Vietnam
could soon move to impose capital controls on
foreign-equity investors, including a one-year
lock-up on portfolio investment inflows. Foreign
investment banks operating in Vietnam, including
Credit Suisse and the Australia and New Zealand
Bank, have already issued warnings to their
clients about the possible introduction of new
restrictions.
It's unclear whether this
week's regional stock-market meltdown has affected
the government's thinking, although the local
bourse was relatively unscathed by the foreign-led
selloff. Any move will likely come after, rather
than before, Euromoney hosts its second annual
Vietnam Investment Forum on March 19 and 20, an
occasion when last year the government
successfully showcased its free-market credentials
to prospective foreign investors.
Curtailing foreign-capital flows -
particularly so soon after entering the WTO - will
inevitably earn Vietnam the opprobrium of
free-market purists. Critical Western media have
already asserted that just by considering capital
controls, Vietnam's economic mandarins have
gleaned the wrong lessons from the 1997-98 Asian
financial crisis. That is, rather than resorting
to administrative fiat, policymakers should allow
market forces to correct any pricing distortions
that speculators may have built up in the stock
market.
That simple argument, of course,
is debatable in light of the reams of academic
literature that demonstrate financial
liberalization without proper sequencing of
capital-account reforms can wreak unnecessary
havoc on a developing country's economy and banks,
as was the case in Thailand in 1997. Nor is there
a technocratic consensus on the efficacy of
capital controls, particularly in cases where the
restrictions are applied on incoming rather than
outgoing foreign portfolio investments.
Unsteady architecture What is
clear is that development of Vietnam's financial
architecture and regulatory regime has
significantly lagged behind its
trade-liberalization drive, which was fast-track
prioritized with the government's eye on WTO
accession.
Dealing on Vietnam's small and
illiquid capital markets is a wild and wooly
affair. Trade volumes on the unofficial
over-the-counter securities market, even with the
recent rally, exceed those at the official Ho Chi
Minh Securities Trading Center (HOSTC) by nearly
three times.
While there are about 200
companies listed on the HOSTC, there are well over
7,000 unlisted joint-stock companies - many
equitized from state-owned enterprises or set up
by private entrepreneurs - that trade their shares
informally. Moreover, nearly all bond transactions
are currently conducted over the counter,
reporting to the HOSTC only for clearing and
settlement purposes. The informal markets emerged
in response to the government's long delays in
developing and opening access to the formal
capital market, which was only established in
2000.
And "informal" may be an
understatement. Independent, unlicensed brokers,
many of whom work behind the scenes for licensed
brokerages, do a booming unregulated trade buying
and selling unlisted shares for clients. Many
operate out of open-air cafes in Ho Chi Minh City
and settle official certificates and cash within a
few days of the transaction, taking a 0.5%
commission on the trade's value.
So far
the parallel system has worked without any
hitches. But because the settlement of unregulated
trades has no legal protection, but rather relies
on the reputation of individual brokers, a sudden
stock-market meltdown could put the integrity of
these brokers to a moral test and could leave many
middle-class punters high and dry - similar,
perhaps, to the widespread unregulated pyramid
schemes that collapsed, sparked social
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