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Cablegate: Vietnam's Securities and Capital Markets

VZCZCXRO3022
RR RUEHHM
DE RUEHHI #1152/01 1731050
ZNR UUUUU ZZH
R 221050Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5716
INFO RUEHHM/AMCONSUL HO CHI MINH 3294
RUEHGP/AMEMBASSY SINGAPORE 2413
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 HANOI 001152

SIPDIS

TREASURY FOR OASIA
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN VM
SUBJECT: Vietnam's Securities and Capital Markets

REF: HANOI 1149

1. (SBU) Summary: Vietnam's securities authorities are still
struggling with implementation of the new law. Vietnam's new
Securities Law (SL) -- in effect since January 2007 -- is not being
fully implemented, according to both GVN officials and market
participants. Investors, including foreign investors, are still
looking to invest, even in unlisted firms with limited disclosure.
The downturn in the stock market in March, however, seems to have
weakened the immediate case for capital controls, although its use
in the future has not been ruled out. Meanwhile, efforts to calm
markets will continue, including: registering unlisted public firms
in order to improve disclosure, custody, clearing and settlement
procedures; increasing the supply of public companies on the
exchange; and improving market surveillance.

2. (SBU) This is one of five cables reporting on Regional Financial
Attache Susan Baker's May 29-June 1 visit to Vietnam. This message
reports her findings and impressions of Vietnam's securities and
capital markets.

INSTITUTIONAL REFORM
--------------------

3. (SBU) One key component of Vietnam's new securities law is
splitting the stock trading centers (in Hanoi and Ho Chi Minh City)
from the State Securities Commission (SSC). SSC Deputy Director for
Securities Market Development Dr. Nguyen Son explained that the
"roadmap" for implementing this part of the SL envisioned this
separation within eighteen months of the law (i.e., by June 2008).
In May 2007, the Prime Minister approved the "equitization" of the
Ho Chi Minh City stock trading center. The new HCMC Stock Exchange
(HSE) will be officially launched in July 2007. After this
transformation, the HSE will focus on trading of listed equities and
the Hanoi securities trading center will focus on over-the-counter
stocks and bonds, especially government bonds.

4. (SBU) On the bond front, SSC officials said that the MOF is
preparing a proposal to launch a primary dealer (PD) network, which
may allow banks and insurance companies to become PDs in addition to
securities companies. Under this plan, the MOF would oversee the PD
network while the SSC would monitor the secondary market. Vietnam
intends to follow up its very successful $750 million offshore
government bond offering (late 2005) with an additional $1 billion
offering soon. MOF officials acknowledge the need to reduce the
number of domestic government bond issuances from the current 400
different types, and are working to restructure this by re-opening
some issuances and focusing on a few key tenures. MOF officials
note the lack of trained staff to improve government debt
management.

SSC JUST STARTING TO REIN IN OTC MARKETS
----------------------------------------

5. (SBU) Vietnam has "equitized" approximately 1600 state-owned
enterprises (SOEs), selling shares at a discounted price to
employees, with allocations determined by the employee's tenure at
the company. These shares have then been traded in a thriving OTC
market, which some market participants have claimed to be roughly
three times larger than the market capitalization of the companies
whose shares are publicly listed on the Hanoi and HCMC's securities
trading centers. These OTC trades take place privately, usually
without involvement from regulated intermediaries, exchanges or
custody companies. It is common for private individuals to agree to
make a trade -- often meeting through an internet website -- and
then to go directly to the company to register the change in share
ownership and exchange funds.

6. (SBU) A vital part of the GVN's plan to improve investor
protection in the OTC market is the registration requirements in the
new SL. FinAtt's understanding is this would require all companies
with more than 100 owners and $5 million in registered capital to
register with the SSC and begin complying with its disclosure
standards. This in effect makes publicly-owned but unlisted
companies subject to the same disclosure requirements as listed
companies. Registered companies would also be required to use
official custody companies for clearing and settlement of shares.

7. (SBU) According to SSC officials, however, with only one month to
go before the official registration deadline, only 100 additional
companies have registered. (Note: For comparison: one private
consultant estimates there are roughly 450 large public, unlisted
SOEs that would be large enough to do a listing, and approximately
1600 SOEs have "equitized" with employees being given shares. End

HANOI 00001152 002 OF 003


note.) The SSC is now preparing a proposal to implement the SL's
registration requirements, and inform the registered companies of
their obligations for improved disclosure and custody procedures.
They have also conveyed the new requirements to the various line
ministries who oversee the SOEs. If these measures are not
effective, the SSC said they would consider imposing sanctions or
fines on unregistered companies.

8. (SBU) The SSC is also trying to improve its market surveillance
capacity. The Prime Minister issued a decision to allow the SSC to
create a new functional division for market surveillance, including
surveillance of foreign investors. The SSC is working on a proposal
to strengthen surveillance with the stock trading centers/exchanges,
custody companies and securities companies. It also plans to
separate the functions of surveillance and enforcement, and noted
training being received from U.S. experts on these topics.
Officials also noted the difficulty of tracking foreign ownership of
companies due to the use of nominees. Even though foreign ownership
in listed companies is capped at 49 percent (30 percent for banks),
market participants estimate current foreign ownership is around
23-25 percent of the entire market.

SUPPORT FOR CAPITAL CONTROLS WEAKENS, BUT NOT GONE COMPLETELY
--------------------------------------------- -----

9. (SBU) In February 2007, the Vietnamese government was
contemplating the imposition of capital controls to reign in an
exploding stock market. The Prime Minister himself made the
decision not to impose capital controls at that time, with input
from the Ministry of Finance, the State Bank of Vietnam and HSE,
among others. In response to FinAtt's questions, officials from the
SCC and HSE both acknowledged that the government does not have
enough information to determine whether foreign or domestic
investors were the primary drivers behind the increasing stock
prices. A one-time survey by the SSC estimated that some 260
offshore funds had raised $5 billion specifically to invest in
Vietnam, but they were not sure how much of these funds had already
been invested. (Note: Other market participants believe some $3.4
billion worth of investments had already been made by funds
dedicated to investing only in Vietnam. End note.) None of these
figures takes into account potential investment allocations from
funds not solely dedicated to Vietnam. Many officials and market
participants expressed concern about the "wall of money" wanting to
invest in Vietnam.

10. (SBU) As the stock exchange cooled off in March, the perceived
need to do something dramatic to take pressure off the stock market
seems to have abated. For example, several government officials
noted that the decision on the introduction of a short-term capital
gains tax to discourage speculation had been postponed until the
National Assembly discussion of a larger overhaul of personal income
tax, currently planned for 2009. (Note: SSC estimates that 90
percent of trades are by retail investors and 10 percent by
institutional investors. End note.) Nevertheless, the government
has stepped up announcements of "equitizations" and subsequent
listings to increase the supply of securities available for
investment on the stock exchange. Moreover, while all government
officials we met contend that any decision on capital controls will
be in line with the new securities law and Vietnam's WTO
obligations, none of them rules out imposing capital controls in the
future.

MARKET ACCESS FOR FOREIGN SECURITIES FIRMS
------------------------------------------

11. (SBU) Vietnam agreed to allow 49 percent foreign ownership of
securities companies upon accession to the WTO, rising to 100
percent foreign ownership after five years. SSC officials said that
they expected to exceed their minimum WTO commitment to allow
majority, even 100 percent, foreign ownership of asset management
companies before the five-year transition period ends. However, they
expect that foreign ownership of securities companies will remain
capped at 49 percent for the next five years, before moving in one
step to 100 percent.

12. (SBU) Comment: The good news is, for the time being, the sense
of urgency about needing to cool the stock markets seems to be gone.
The bad news is the beneficial parts of the SL are not being
implemented fully. More specifically, the lack of consolidated
supervision -- and clear interest on the part of banks in providing
securities services and related lending -- may put the entire
financial system at risk in the event of a major down turn. Thus,
aside from the increase in supply of investable securities that is
already in train, it is not clear what tools the government would
have to dampen any future excessive exuberance. End Comment.


HANOI 00001152 003 OF 003


ALOISI

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