Building An International Financial Centre in Vietnam: Unpacked
Just days after the Government of Vietnam announced it had approved a plan to create regional and international financial centres in Vietnam’s Danang and Ho Chi Minh City, the Vietnam Securities Depository and Clearing Corporation announced it had withdrawn from the Global Association of Central Counterparties.
This was significant in that a lack of a counterparty clearing house is one of a myriad of reasons Vietnam’s stock market is still considered a frontier market, as opposed to emerging, by key ratings agencies MSCI and FTSE Russell. Moreover, it’s difficult to imagine any sort of international financial centre in the world that doesn’t have a world-class stock exchange at, if not very close to, its heart.
The point here is that whereas the aforementioned plan looks great on paper, the reality on the ground is that without significant regulatory reforms, this is how it will likely remain. With this in mind, this article looks at a handful of the more prescient regulatory reforms that would likely need to be addressed in order to see an international-standard financial centre develop in Vietnam.
Firstly, stock market reform.
The stock exchange needs more products. As it stands, trade on the HoSE is mostly limited to the direct purchase and sale of shares, bonds, and ETFs. Most of the world’s biggest exchanges, however, have vastly wider ranges of products usually including things like warrants, options, and commodities.
At least part of the challenge here is that the HoSE is, on a technical level, unable to carry out trades in these more complex products. Whereas this is being addressed with an upgrade to the same technology used by the Korean Stock Exchange–the KRX–this was supposed to start operating as far back as 2015 but to date is still not live on the back of delays in passing regulatory hurdles.
But even with more products, foreign ownership limits will also need to be addressed. Currently, of 396 stocks on the exchange 357 have some form of foreign ownership with 267 limiting foreign ownership to 49 percent or less. This means that for more than two thirds of stocks foreign firms cannot own a controlling interest.
On that note, foreign investment in Vietnam’s banking sector–banking also being a core pillar of most international financial centres–is also heavily regulated. Foreign ownership in banking stocks is capped at 30 percent for most banks.
Moreover, the State Bank limits how much money banks can lend and sets the interest rates at which, or at least bands within which, they can lend it. To expand further on the bank’s powers, it also sets the exchange rate for the dong against most of the major currencies only allowing trading within a 5 percent band either side and it restricts foreign exchange trading to mostly banks and securities firms.
But perhaps most crucially when it comes to the State Bank, those powers are often exercised at the direction of the government and the National Assembly, not necessarily in response to actual economic conditions. This can make it difficult for outsiders to see changes in things like interest and exchange rates before they happen and manage their investments accordingly.
And all of this is in contrast to the statuses of the world’s leading financial centres–New York, London, and Singapore, for example–which are crystallised by comparatively limited regulation and government intervention.
That is to say, choosing where a financial centre might be located at this point in time looks to be putting the cart some way before the horse.
That’s not to say that at some point in the future the conditions won’t be right for Vietnam to have a bigger role in international finance with regulatory reforms slowly taking place.
For example, a move was made late lasts year to remove pre-funding requirements. Notably, the change was for institutional investors only so it’s not clear this will be sufficient to satisfy MSCI and FTSE Russell criteria. It’s also been on a list of things to do for the last six years and only just came about which suggests if further change is needed it might take some more time still. That said, it looks to be a step in the right direction.
Furthermore, an update to the Law on Securities, approved by the 8th Session of the National Assembly, added a provision for a central counterparty clearing house to be established as a subsidiary of the Vietnam Securities Depository and Clearing Corporation. It’s not clear how this might play out in practice yet, but again, it looks like a step forward.
That said, ensuring these reforms are effective takes persistence and focus.
With this in mind, this latest development could serve as more of a distraction rather than help to move the process along.
That is to say, building world class international financial centres in Danang and Ho Chi Minh City is a nice idea, but the reality is that realising this ambition is a long way away and without significant regulatory reforms it is very far from becoming a real possibility.
