Can Viet Nam handle its stock market?

Monday, April 28, 2008
Poorly managed and overrun by investors who act like gamblers, Viet Nam’s stock exchanges may have been born into a country that wasn’t ready for them.
Is Vietnam prepared for a financial market that follows market-based principles and helps the country integrate into the global economy? Based on market developments earlier this year, the answer is no.
The State Securities Commission’s (SSC) decision to cut the share trading band on the stock markets to 1 percent and 2 percent on March 25 was a Band-Aid solution to the market’s major fall earlier this year.
No established stock market would change its rules so abruptly.
In the long term, it could be hard to attract investors, especially foreign ones, to a market that does not adhere to normal principles.

The strength of a stock market can be demonstrated by its management agencies’ ability to establish and enforce “delicate” policies that help them achieve their desired targets fairly.

The most important responsibilities of the SSC are to enforce regulations and ensure market transparency.

But investors can hardly find accurate data about listed companies as SSC has not pushed them on this issue.

Earlier this year, a company preparing to list said their assets had grown about ten-fold because the prices of the properties they invested in were soaring.

SCC should have blown whistle on this false claim.

Such claims could be found in many announcements of listed companies but SSC and the two stock exchanges’ managers did nothing to correct it.

Recently, when the stock markets stalled for 10 straight days two weeks ago, everyone worried that their collapse would affect many important sectors, especially the banking sectors which had been generous to stock loans, and the economy as a whole.

But the stock market managers’ role should have been to coordinate with other responsible government agencies to find out and address the root cause of the fall, not only focus on reversing the trend.

The answer as to whether or not Vietnam is ready for stock markets is even more apparent when we take a closer look at the listed companies.

There is some level of greed on all markets, but the greed that many listed companies displayed on our market last year was too much.

Equitization and initial public offerings have brought giant sums of money to many companies, arousing in them a desire to earn as much as possible for themselves without regard for the interests of shareholders.

Share auctions earned these companies bit money that they did not how to spend effectively.

They therefore started issuing bonus shares to turn the money into an increase of their capital.

They also invested in other companies and saw their investment double or triple after some time.

Obviously, the market was unprepared for this “strategy” so stock prices ballooned and burst, as we’ve unfortunately seen.

Listed companies do not know how to use their financial capacity to encourage employees and develop optimum business strategies.

Their executive officers, who often hold the largest stakes, have ignored small shareholders and the companies’ long-term future to make decisions that only benefit themselves in the short term.

Finally, local investors have played the stock market as if they were gambling.

For them, stock prices must fluctuate vigorously to make big money fast.

Very few care about dividends let alone a long-term investment strategy.

It is different in other countries: individuals invest in stock indirectly through mutual funds or pension funds.

Few would spend the whole day at the stock exchange and even fewer would use bank loans to invest in stocks.

Foreign investors, who are expected to stabilize the market, are in fact a varied lot.

Many of them are professional investors.

Many others are sheer speculators.

They can one day buy a lot of shares and become a company’s “strategic partner,” but a few months later they sell the shares for a big profit.

An example was Texas Pacific Group (TPG) Ventures which bought into top Vietnam technology firm FPT at a low price to become its strategic partner in late 2006 but sold a large volume of the shares for big profits six months later.

When the main market components are not prepared for the long-term, abnormal fluctuations are inevitable.

Let us hope the market’s harsh natural selection will force everybody to think and act professionally.

In the mean time, it’s sensible – and essential – to slow the opening of the financial market.

Just imagine, if the stock market grew larger without reservation and the participation of foreign investors continued to grow unchecked, could a new stock market crash be even more disastrous than the last one? (TBKTSG)