VZCZCXRO7190
OO RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHNAG RUEHPB
DE RUEHHI #0290/01 0451018
ZNR UUUUU ZZH
O 141018Z FEB 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4624
INFO RUEHHM/AMCONSUL HO CHI MINH IMMEDIATE 2553
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RHEHNSC/NATIONAL SECURITY COUNCIL WASHINGTON DC IMMEDIATE
RUEHGP/AMEMBASSY SINGAPORE IMMEDIATE 2279
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION

UNCLAS SECTION 01 OF 03 HANOI 000290 
 
SIPDIS 
 
STATE FOR EB/OMA, EAP/MLS AND EAP/EP 
TREASURY FOR ANDY BAUKOL, CAROL CARNES AND SUSAN CHUN 
STATE PASS USTR DAVID BISBEE 
SINGAPORE FOR SUSAN BAKER 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV VM
SUBJECT: TREASURY LETTER DELIVERED ON CAPITAL CONTROLS 
 
 
HANOI 00000290  001.2 OF 003 
 
 
(U) This cable contains sensitive information and should not be 
placed on the internet. 
 
REF:  (A) HANOI 260 
  (B) HO CHI MINH 143 
 (C) Feb 13-14 e-mails from Treasury 
 
¶1.  (SBU) Summary.  While no senior Vietnamese officials were 
willing to talk on the phone with Treasury about capital controls, a 
cooperative Office of Government official was amenable to receiving 
written comments.  Embassy delivered a letter from Treasury DAS 
Dohner to Mr. Hung that discussed the importance of open capital 
markets for investment, the negative repercussions of controls, and 
alternative measures.  On the private sector side, the Prime 
Minister has not responded to the Bank Working Group's February 7th 
request for a meeting.  In the meantime, there was an unconfirmed 
market report this afternoon that a government committee met 
yesterday and voted against the proposed capital controls.  End 
summary. 
 
¶2. (SBU) Reftels reported Prime Minister Dzung is considering the 
imposition of capital controls in an effort to deal with an 
overheated stock market.  On February 13, we tried to set up a phone 
call from Treasury Deputy Assistant Secretary for Asia Robert Dohner 
to a senior Vietnamese official in order to obtain more information 
about the rumored capital controls and to consult. 
 
¶3.  (SBU) First, we reached out to Finance Vice Minister Ha, but his 
office replied that the MOF is not responsible for the capital 
controls issue.  They directed us to contact the State Bank of 
Vietnam (SBV).  We did.  Deputy Governor Nguyen Dong Tien replied 
that the capital controls issue is currently under consideration and 
decision of the Government, and thus beyond authority of the SBV and 
the Deputy Governor to speak or discuss the issue.  Finally, we 
contacted Mr. Bui Huy Hung, International Relations Director in the 
Prime Minister's Office.  Hung explained that capital controls are 
an extremely complex and sensitive issue and he preferred not to 
discuss it on the phone.  He suggested, however, that Treasury 
provide written comments.  (Comment:  Hung has been a cooperative 
contact of the Embassy.  He has been in the driver's seat on the 
Vietnamese side during the annual meetings under our Bilateral Trade 
Agreement (BTA).  End comment.) 
¶4. (SBU) We delivered the letter (ref C and full text in para 6) of 
Treasury Deputy Assistant Secretary Robert Dohner to Hung on 
February 14.  The letter expresses USG encouragement for open 
capital markets because of their importance in promoting foreign 
investment, describes the negative repercussions that capital 
controls can have on an economy, and suggests other policy 
alternatives that are available. 
¶5. (SBU) Our contacts with Citibank indicate that the Prime Minister 
has not responded to the February 7th request of the Bank Working 
Group of the Vietnam Business Forum for a meeting to discuss the 
capital controls issue. 
¶6.  (SBU) Following is the text of the DAS Dohner letter delivered 
to Mr. Hung. 
 
BEGIN TEXT 
 
Thank you for the opportunity to consult on the economic challenges 
you are facing as a result of your rising stock market and strong 
capital inflows.  I have been working on Asian economic issues for 
many years, and have come to admire the economic dynamism, 
commitment to strong policies, and solid growth in the region, 
including in Vietnam.  I accompanied Secretary Paulson on his visit 
to Hanoi for the APEC Ministers meeting and had the pleasure of 
meeting with Deputy Finance Minister Ha and other members of 
Vietnam's economic team.  Vietnam's accession to the WTO is a 
highlight of the progress that Vietnam is making by opening up to 
the world economy. 
 
Currently, Vietnam is facing a specific challenge in dealing with 
capital inflows that have contributed to a rapid rise in the stock 
market.  We have heard that your government is considering various 
policy options, including the imposition of capital controls on 
foreign portfolio investments, such as a one-year lock-up period. 
As an economic partner with Vietnam, we wanted to consult so that we 
fully understand your issues and see if we can be of assistance. 
 
The U.S. Government has encouraged open capital markets, since the 
ability to transfer capital freely into and out of a country is 
important to promoting foreign investment, to the development of 
 
HANOI 00000290  002.2 OF 003 
 
 
domestic capital markets, and to encouraging strong and sustained 
growth. 
 
Based on the experience of other countries with capital controls, we 
believe that controls have negative repercussions on an economy, on 
balance. The imposition of controls undermines investor confidence, 
and generally have costs that are often unanticipated at the time 
the controls are introduced.  Additionally, capital controls require 
significant administrative costs, and investors typically find ways 
around the controls over time.  As a result, the effectiveness of 
controls tends to decline over time while their costs increase. 
 
There may be other policy alternatives available to you that would 
help achieve your objectives at a lower economic cost, such as 
setting limits on margin loans and unsecured loans for equity 
investments, faster liberalization of capital outflows, equitization 
of state-owned enterprises (to provide greater supply of equity 
market instruments to meet demand), and greater exchange rate 
flexibility. 
 
Also, I'd like to provide you an update on our technical assistance 
partnership.  As you may know, the Treasury Department in recent 
months has stepped up our technical engagement with the Finance 
Ministry.  In particular, Treasury will be sending a technical 
assistance team to Hanoi in March to move forward on the Tax 
Administration Technical Assistance our governments have been 
discussing.  This team will seek to draft a Terms of Reference and 
develop a detailed work plan for 2007 in the areas of human 
resources, management training and internal investigations. 
Further, more Treasury teams will visit over the next several months 
to start developing technical assistance projects in the areas of 
financial sector and capital market development.  We value this 
engagement and look forward to continued consultations. 
 
If you wish I would be happy to continue discussions on capital 
controls and their alternatives via a phone call or an exchange of 
letters if you wish. 
 
END TEXT 
 
¶7. (SBU) We will report any response that Mr. Hung has to the 
letter.  The government largely shuts down beginning on February 16 
for the Tet holiday and does not fully resume business until 
February 26. 
 
Unconfirmed report not to adopt controls 
---------------------------------------- 
 
¶8. (SBU) There was a market report today from J.P. Morgan that the 
National Monetary and Finance Committee of the Vietnam Government 
met on February 13 and voted against SBV proposal to introduce 
financial controls.  We were not able to confirm the facts of this 
report.  A contact at the State Security Commission (SSC) told us 
this committee did meet on February 12 to discuss the recent 
developments in the securities market but he could not confirm any 
information on any vote.  His opinion was that the Prime Minister 
would not sign the SBV's proposal because of awareness of the 
negative experience in Thailand after its government introduced 
controls. 
 
¶9.  (SBU) Mr. Hung at OOG was also not aware of this meeting.  He 
commented that the GVN wants to develop the securities market and 
would not plan to introduce non-market control measures to reduce 
market activities.  At the same time, he also noted that because the 
securities market is still young and growing hot recently, it would 
need close monitoring and good management.  He underscored that any 
measures taken would be considered carefully to ensure that they 
comply with WTO commitments. 
 
¶10.  (SBU) Another contact at the Ministry of Finance could not 
confirm the reported February 13 meeting.  He predicted that the 
securities market would continue to grow and he argued it is not 
likely that the GVN would introduce control measures that would have 
negative impacts on the market. 
 
Comment 
------- 
 
¶11.  (SBU) COMMENT:  We should know by the end of the week whether 
Vietnam launches a Tet offensive against capital inflows or if 
cooler heads prevail in deciding how to deal with a hot stock 
 
HANOI 00000290  003.2 OF 003 
 
 
market. 
 
ALOISI 
 
 
 
 
 
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