Development of Stock Exchange in Vietnam Essay Example

trading in securities. • Expanding the operations of intermediary organizations to improve investors’ services • Building up a system of investment for domestic and foreign investors

• Intensifying the state control and monitoring over the stock exchange As per the website from the Ministry of Finance “HSTC began with two listed companies and a total of VND270 billion (US$16. 87 million) in listed value but as of March 31, 2005 it developed to reach a total listed value of VND27,500 billion (US$1. 71 billion), including nearly VND1,500 billion ($93. 75 million) worth of stocks of 28 current listed companies and over VND26,000 billion ($1.

62 billion) worth of bonds issued by the Central Government, local governments and the Bank for Investment and Development of Vietnam (BIDV)”

Controlled by the State Securities Commission the purpose of instituting the stock exchange by the Vietnamese government was for the mobilization of adequate capital for the development of the Vietnamese Economy. At the time of starting the Stock Exchange, the government made regulations for the foreign organizations to hold a share capital of up to 20 percent of a public company listed in the stock exchange. This was later revised to 49 percent. Similarly regulations were made for a ceiling in the share holding of up to 3 percent in a Vietnamese company for the foreign individuals.

State Securities Commission:

Abacus reports that the ‘State Securities Commission’ (SSC) established in the year 1996 is the controlling authority for the Vietnamese Stock Exchange known as ‘Ho Chi Minh City Stock Trading Centre’. Broadly the main function of the SSC is to regulate the capital market developments in

Vietnam. This function is discharged by the commission by formulating regulations governing the stock trading including the licensing of the participants. The commission prescribes the various listing requirements to be complied with the companies for getting their shares listed with the Vietnam Stock Exchange.

Reasons for the Stock Exchange Boom in Vietnam: Manraaj Singh states “the IMF predicts that Vietnam will grow by 7.

8 percent in 2006. Its fast-growing economy, stable politics, its forthcoming accession to the WTO and the government’s commitment to pro-market reforms have all contributed to make Vietnam attractive to international investors” The foreign direct investments (FDI) were expected to be in the regions of around US $ 9 billion in the year 2006 registering a growth of about 31. 7 percent over the year 2005. The ratio of FDI to GDP had almost leveled that of China.

These factors have definitely contributed for the boom in the Vietnam Stock Exchange. With an annual growth of about 88 percent the number of investors stood at 60,000 as of August 2006, doubling the number of investors as at the end of the year 2005 and 20 times as high as the first year of the inception of the exchange. From the close of the year 2005, the Vietnam Stock Index rose up to 60% till April 2006. For the same period from a market capitalization of $144 million for 22 listed companies two years ago, it has increased more than tenfold, to $1. 5 billion for 35 companies.

Ma King analyses the reasons for the economic boom in the country as • The economic growth of the country witnessed

a consistent growth of about 7% annually for the last 5 years and is expected to keep the trend.

• The low per capita income in Vietnam of only $600 a year attracts an increased number of foreign companies to base their operations there rather than in China, where the per capita income is as high as $1700. • It is believed by many of the foreign Companies that it is better to diversify their operations to Vietnam since the country is supposed to be a better guardian of intellectual property than China.

Apart from the above reasons the spur of the activities in the Vietnam Stock exchange is further activated by the varied participants of the stock and securities trading in the country. The Financial Times reports "After watching the formal stock market's main index soar by 249 per cent over the last 13 months, Vietnam's emerging middle class is in the throes of stock market mania and students, civil servants and state enterprise managers with cash to spare are all rushing to buy shares and dreaming of windfall profits”.

Hence the main reason for the phenomenal growth and boom in the Vietnam Stock Exchange is the large flow foreign direct investments.

As observed by Barbara Wall of International Herald Tribune “Despite the administrative bottlenecks, foreign capital is pouring into Vietnam at a staggering rate. At least $14 billion has been invested in Vietnam so far, and this has helped drive the economy forward. ” The boom of the Vietnam stock exchange has also brought with it the associated risks that may endanger the investments of billions of dollars in the securities.

The Economist enumerates the potential dangers of the boom in the stock exchange.

According to report form the Economist “risks are not much lower on the official exchange. Many firms, including state companies up for privatisation, are only now starting to keep proper, audited accounts. The State Securities Commission is struggling to keep up with the flood of new listings. Reliable information is scarce, making it easy to whip up prices by spreading rumours”. Apart from these factors the dealings in gray market and the insider trading also act to the detriment of the genuine investors.

Functioning of the Vietnam’s Stock Exchange since the year 2006:

Bill Bonner (2007) reports that “Democracy and capitalism are supposed to be the big victors of the post-Cold War period, but the hottest markets are neither democratic nor really capitalistic. China is soaring, of course. But so is the nation that kicked out U. S.

troops 35 years ago so it could enjoy its own miserable system of misgovernment - Vietnam. ” Since there is abundance of money supply due to a rapid economic growth the investments in stocks was showing an alarmingly increasing trend with the result the number of people involving themselves in the stock exchange trading swelled.

This has also enhanced the total amount of investments in the stocks manifold than it was in the year 2002 or before. The reason for such a mad rush for the stock trading can be attributed by the increasing number of firms listed in the Exchange. Starting with 4 companies in July 2000, there are more than 107 companies listed in the Vietnamese Stock Exchange as

of the year 2006. The Financial times reports “The recent bull-run on the formal exchange, with 107 listed companies, has been propelled partly by foreign investors, eager for exposure to one of Asia’s fastest-growing economies.

”

Although the privatization of the state owned enterprises can be partly cited as the reason for the increased activity in the stock exchange the larger money supply in the hands of the people is the main reason for such a surge in the market. The larger money supply has given rise to new sets of investors in the equities of the companies. According to Clay Chandler (2006) “Vietnam's main stock exchange, launched in Ho Chi Minh City six years ago, is still embryonic, with 50 firms and a market capitalization of only $3 billion. But daily trading volume now tops $10 million, a twenty fold gain since January 2006.

” There were more than 30 New Public Offerings expected before the end of the year 2006. When the government’s plan to allow the shares of the large state owned enterprises in various sectors like banking, telecommunications and mining to be listed in the stock exchange and allowed to be traded freely the stock market boom in Vietnam will reach its peak. At that point of time it is expected that the market capitalization will be almost more than $ 10 billion making the stock marketing transactions reach phenomenally higher positions.

Performance of the Vietnam Stock Exchange: The performance of the Vietnam Stock Exchange is measured by the Vietnam Stock Index. Bloomberg News states that “The Vietnam Stock Index is a capitalization-weighted index of all the companies

listed on the Ho Chi Minh Stock Exchange. The index was created with a base index value of 100 as of July 28, 2000.

Prior to Mar 1, 2002, the market only traded on alternative days” The formal market index rose up to 144 percent in 2006 and up to 44 percent in 2007.

Totally the index rose by 249 percent over the last 13 months period. However the size of the legitimate market is limited and makes is still illiquid for large investors. The bourse already has 107 listed companies and stock brokers’ count has increased to 56 in 2006 from 16 in early 2005. The movement of the all stock index which is currently at 965. 72 is shown by the following graph.

The graph shows the movement over a period of one year. It may be observed that from July 2006 onwards there has been a steady increase in the stock index.

Ben Stocking (2006) observes “the market is drawing many novice Vietnamese investors, who often seem to operate with a herd mentality. A lot of them buy when prices are going up, not when they're going down. Many took a hit when the market surged earlier this year (2006), rising to 630 points before falling to 400. ” Tran Dac Sinh, director of the Ho Chi Minh City Stock Trading Center says “investors have more choices every day.

The number of listed companies has risen by 50 percent in 2006 and is expected to double again by year's end, when tax incentives for listing will expire”

Tan Tran (2007) reports “A recent report of AFP shows that Vietnam’s

main stock exchange, the 7 year –old HCMC Securities Trading Centre has made a stunning growth from around $300m in early 2006 to a volume of over $16b now”. Data from the Financial Times show that the benchmark VN-Index rose nearly 145 percent in last year and so far has gained over 47 percent. According to Saigon Securities Inc. one of the largest stock broking companies in Vietnam, the number of Vietnamese who indulge in the stock market operations can be estimated to be at least 500,000 and the number is increasing progressively.

Stock Market Boom in Vietnam - Issues of Concern: The Shares of companies in Vietnam are under-priced. This is evident from the fact that the price to earnings ratio is 11.

9 in Vietnam, whereas it is 18 in China. The gross under-pricing of the securities may lead to a bubble in the market which will prove detrimental to the country’s economy in the long run. The Share market operations are relatively very less in number compared to other bigger exchanges. Bloomberg News (2006) reports “An average of just $7.

8 million of Vietnamese shares was traded daily in the past three months, compared with $18 billion on the first section of the Tokyo Stock Exchange, the world's second-biggest equity market.

” This poses a major problem for the large investment companies to off load larger volume of shares without a price reduction. Hence if an investment firm would like to realize its entire investments in a particular share it may not be readily possible as in the case of other bigger exchanges. Hence these firms always carry this risk.