VIETNAM GVN COMMENTS PUBLICLY ON CAPITAL CONTROLS

C O N F I D E N T I A L SECTION 01 OF 02 HANOI 000374

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(C O R R E C T E D C O P Y - CATIONS AND TEXT)

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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

E.O. 12958: DECL: 02/28/2017
TAGS: EFIN ECON ETRD EINV VM
SUBJECT: VIETNAM GVN COMMENTS PUBLICLY ON CAPITAL CONTROLS

REF: A. HANOI 337


B. HANOI 300

C. HANOI 290

D. HANOI 260

HANOI 00000374 001.4 OF 002


Classified By: ECONOMIC COUNSELOR ALAN R. TOUSIGNANT, REASONS 1.4B
AND D


1. (C) Summary: Both privately and via public statements,
Government of Vietnam (GVN) officials have reiterated
assertions that Vietnam has no current plan to impose capital
controls on foreign investors to cool down the country's
stock market. Deputy Prime Minister Nguyen Sinh Hung
provided the first official government comments on the issue
in the state media on February 23. While officials have
asserted that stories of impending capital controls were only
rumors, Vietnam's IMF representative told Econ Counselor
that the State Bank of Vietnam had prepared a study on
administrative measures to cool the market for a meeting of
the National Monetary and Financial Policies Council on
February 12. The body, chaired by DPM Hung, decided that no
measures should be taken. According to local media on
February 28, Prime Minister Nguyen Tan Dzung issued
instructions on measures to manage Vietnam securities markets
transparently. End Summary.


2. (U) On February 23, state-owned media reported Deputy
Prime Minister Nguyen Sinh Hung told a meeting of the State
Securities Commission (SSC) that the securities market may be
"hot" at the moment, but the GVN was not considering closing
or restricting the market and will not manage the securities
market and investment in the market through administrative
measures. DPM Hung also stressed the need to intensify
inspections of licensed securities companies and revoke
license certificates of any unqualified company. The report
also cited the comments of the SSC Chairman Vu Bang that
"management does not mean stopping but aims at securing
knowledge of the capital flows of foreign investors." He
also said "the SSC will require foreign investors and
investment funds to re-register in the coming time to
publicize reporting regulations. It will also join hands
with banks to keep a watch on investment capital sources."
These are the first official comments released publicly by
the Vietnamese government since rumors surfaced that the
government was considering imposing capital controls to deal
with an overheated stock market.


3. (SBU) In addition to the Deputy Prime Minister's
comments, Bui Huy Hung, Director of International Relations
in the Office of the Government (also known as the Prime
Minister's Office) responded to a February 14 letter by U.S.
Treasury Department Deputy Assistant Secretary Robert Dohner.
In an email response to Econ Counselor on February 25, Hung
referred to the February 23 statement, stating that DPM Hung
"confirmed that Vietnam is not (putting in place) non-market
policies of controlling foreign capital flow, as had been
rumored." Hung stated that the stock market of Vietnam "is
too small" but that the GVN is doing its best to develop it
in a "sustainable way." The GVN looks forward to support
from international donors, including the U.S. Treasury, and
highlighted U.S-GVN cooperation via the USAID-administered
STAR project, he added. "Please keep Mr. Dohner informed
about this matter," he wrote. "I do hope to meet him in my
next visit to the U.S. with my Deputy PM on March 2007."


4. (C) IMF Senior Resident Representative Il Huong Lee
provided Econ Counselor on February 27 background regarding
the GVN's deliberations on the controls. Lee said that the
issue of capital controls in Vietnam had been raised by the
"leadership" -- a group he defined as including high-level
Communist Party officials, some currently within government
and some not -- because "too many people were invested and
too many small investors were involved, which in Vietnam
means the middle of society." A significant market
correction could upset this important group and lead to
political instability, he said. Leaders were also concerned
about instability from a rise in speculative flows from
abroad and widely accepted rumors of significant amounts of
insider trading. Officials were perhaps even envious of
investors becoming rich from their investments and wanted to

HANOI 00000374 002.6 OF 002


put a stop to their easy gains, he added.


5. (C) Lee said that the State Bank of Vietnam had written a
study for the National Monetary and Financial Policies
Advisory Council (NMFPAC) for a February 12 meeting, just
before the Tet holidays. The study did not include specific
proposals or recommendations, he said. This committee,
headed by Deputy Prime Minister and former Finance Minister
Nguyen Sinh Hung, includes representation from the State Bank
of Vietnam, the Ministry of Finance and the Ministry of
Planning and Investment. NMFPAC reviewed the study but
decided not to take any action, he added. Lee said the
government will likely continue watching the issue but is,
quite rightly, being very cautious. He believes the GVN
understands that any action it could take to implement
measures would require significant coordination and
transparency with all market players so that markets remain
calm.


6. (SBU) In response to our question whether the IMF has
given the GVN advice on capital controls, Lee said he is in
touch with the GVN "on all the issues." He expects the GVN
to continue to watch markets closely to see what, if any,
actions should be taken. As he observed, a key problem is
that GVN does not have a significant grasp of the extent to
which inflows are purely speculative, come from domestic
investors, or stem from foreign equity funds with billions to
invest in one of the world's hottest emerging markets.
Vietnam has opened itself for business by liberalizing over
the last several years, but, in his view, it still lacks
strong institutions to monitor and regulate its markets,
leading to problems including the lack of knowledge of the
sources of flows and increased risk of insider trading.


7. (SBU) According a report in Vietnam Economic Times on
February 28, Prime Minister (PM) Nguyen Tan Dzung has
provided new instructions to manage Vietnam securities
markets. An unofficial translation of the report states that
Dzung issued an official letter "emphasizing the importance
of a complete regulatory framework for the securities markets
to function transparently. For the time being, it is
unnecessary to impose urgently capital controls on foreign
exchange which the SBV proposed in the meeting of the NMFPAC
held on February 12. The securities market is an important
source of capital for Vietnam's development. The Ministry
of Finance, the State Securities Commission, the State Bank
of Vietnam, and the Government Inspectorate shall monitor
and inspect to ensure compliance of the regulations by market
participants, even to revoke licenses and prohibit market
participants to participate in the market if required. The
PM also requested the NMFPAC to study international
experiences to propose solutions for Vietnam to ensure rapid
and sustainable development of the security market, avoiding
unstable socio-economic siuation. At the same time, the PM
requests the Ministry of Finance, the SBV and other bodies to
apply proactively appropriate measures to reduce inflation,
stabilize the Vietnam dong and reduce speculation on the
market.
The measures include:
--Timely purchase of foreign exchange as planned;
--Issue government bonds and bank bills;
--Regulate recapitalization requirements and foreign exchange
positions of commercial banks;
--Implement the regulated trading bands of securities
transactions;
--Promulgate tax on securities activities;
--Push up of equitization (of state-owned enterprises) to
increase market supply."


8. (SBU) Comment: The last measure that the Prime Minister
suggested -- pushing up equitization -- meshes well with the
policy alternative to capital controls suggested in Treasury
Deputy Assistant Secretary Dohner's letter (reftel B) of
"equitization of state-owned enterprises (to provide greater
supply of equity market instruments to meet demand.)" End
Comment.

MARINE