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