Introduction to the capital market
Definition and types of capital market
1.1.1 Definition of the capital market
The capital market serves as a platform for the trading of financial securities, including bonds and stocks, where both individual and institutional participants engage in buying and selling activities.
Capital markets primarily focus on long-term securities, and their scale is closely linked to the overall size of a nation's economy Consequently, fluctuations in one area of the capital market can lead to significant impacts in other regions.
- Spot market: assets are traded for immediate delivery It has three components: a seller, a buyer, and an order book Once a buying/selling order is filled, the transaction concludes right away.
Spot markets are available for an array of investment assets, including stocks, bonds, cryptocurrencies, and foreign currency (Forex) Forex markets include exchanging one money for another.
- A future market is designed to trade contracts calling for future delivery
- Option markets enable contracts that grant the right to buy or sell certain securities at specific prices within a certain time.
The leasing market is a segment of the capital market that focuses on the supply and demand dynamics of capital In this market, the capital supplier, known as the lessor, agrees to purchase assets and equipment as requested by the lessee, who requires capital The lessor retains ownership of the rental property throughout the lease agreement.
- Stock market: A stock market, also known as a stock exchange, is a venue to trade securities, such as bonds and shares.
Sellers of securities are matched with their buyers in a stock market and they trade with each other using rules imposed by the market's governing authority.
The bond market encompasses the trading of debt instruments issued by corporations and governments to raise capital for operations and growth In exchange for the investment, issuers commit to repaying the principal amount along with interest The process of buying and selling bonds operates similarly to stocks, where bids are matched with offers in the marketplace.
- Mortgage market: the business of lending money to buy houses and other property.
Capital market instruments
Equity securities refer to the part of ownership that is held by shareholders in a company.
Investing in a company's equity stock means becoming a shareholder and gaining ownership rights within the organization Unlike debt holders, equity holders do not receive regular payments; instead, they can benefit from capital gains by selling their stocks This distinction highlights the unique position of equity holders as part-owners of the company.
In the event of bankruptcy, equity holders receive only the remaining assets after debt holders are compensated Additionally, companies typically distribute dividends to shareholders from the profits generated by their core business activities.
Debt Securities can be classified into bonds and debentures:
Bonds are fixed-income instruments that are primarily issued by the center and state governments, municipalities, and even companies for financing infrastructural development or other types of projects.
Bonds are financial instruments used in the capital market, where the issuer acts as the borrower They typically feature a fixed lock-in period, requiring issuers to repay the principal amount to bondholders upon maturity.
Debentures are unsecured investment options unlike bonds and they are not backed by any collateral.
The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company.
Derivative instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes.
The four most common types of derivative instruments are forwards, futures, options and interest rate swaps:
- Forward: A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price.
- Future: A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price.
An option is a contractual agreement between two parties that grants the buyer the right, but not the obligation, to buy or sell a specified quantity of derivatives at a predetermined price within a designated time frame.
An interest rate swap is a financial agreement between two parties to exchange interest rates, allowing each party to pay interest on loans in different currencies, options, and swaps This arrangement enables participants to manage their interest rate exposure and optimize their borrowing costs effectively.
Exchange-traded funds (ETFs) aggregate the financial resources of multiple investors to purchase various capital market instruments, including stocks, bonds, and derivatives Most ETFs are registered with the Securities and Exchange Board of India (SEBI), making them an attractive investment choice for individuals with limited expertise in the stock market.
ETFs, which combine characteristics of both stocks and mutual funds, are typically traded on stock markets in share blocks These funds are listed on stock exchanges, allowing investors to buy and sell them during regular equity trading hours as needed.
Foreign exchange instruments are financial instruments represented on the foreign market It mainly consists of currency agreements and derivatives.
Based on currency agreements, they can be broken into three categories i.e spot, outright forwards and currency swap.
The importance of capital market in economic development
The financial market is crucial for both enterprises and the state, as it plays a significant role in their financing Direct financing constitutes a substantial percentage of the overall financial landscape, highlighting its importance in supporting economic growth and stability.
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Financing methods play a crucial role in the development of stock companies, with the primary market serving as a key source of direct financing While the high volume of transactions in the stock market may seem significant, it is essential to recognize the foundational importance of a well-functioning financial market This stability is vital for ensuring sustainable long-term growth in the national economy.
While bank loans and capital market financing can serve as alternative funding sources, they are more accurately described as complementary rather than interchangeable Typically, issuing shares or bonds supplements rather than replaces bank loans, especially when substantial resources are needed for significant investment projects This approach is particularly beneficial when longer loan maturities are desired or when seeking non-repayable funds, despite the trade-off of capital dilution and future dividend obligations.
An increasing number of issuers are embracing financing instruments that were once considered too complex, as the practical benefits of stock exchange listings become evident The capital market's capacity to mobilize significant financial resources is now widely recognized, prompting every publicly listed company to explore bond and share issuance as viable financing alternatives.
The current economic climate presents a unique opportunity for businesses to secure financing, driven by a favorable investment environment that encourages profitable placements.
Principal Functions of the Capital Market
Channel for Savings and Investment
The capital market offers various avenues for individuals and businesses to invest their savings and generate returns Key investment channels in the capital market include stocks, bonds, mutual funds, and exchange-traded funds (ETFs), providing diverse opportunities for earning income and growing wealth.
Stocks, also known as equities, represent a favored investment choice in the capital market, allowing investors to buy shares of public companies By investing in stocks, individuals anticipate generating returns through both capital appreciation and dividend payments.
● Bonds: Bonds are debt instruments issued by governments, corporations, or other organizations to raise capital Investors can purchase bonds and earn returns through coupon payments and capital gains.
● Mutual Funds: Mutual funds pool money from multiple investors and invest in a diversified portfolio of stocks, bonds, and other securities Investors can earn returns through capital appreciation and dividends.
● Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds, but they trade on stock exchanges like individual stocks Investors can earn returns through capital gains and dividends.
Real Estate Investment Trusts (REITs) are companies that manage and operate income-producing real estate assets By investing in REITs, individuals can benefit from rental income and potential capital appreciation, making them an attractive option for real estate investment.
● Commodities: Commodities such as gold, silver, oil, and agricultural products can also be traded in the capital market Investors can earn returns through capital appreciation and dividends.
Allocation of Capital Resources
The allocation of household savings to businesses plays a vital role in capital markets, enabling households to invest according to their financial goals and risk tolerance By utilizing various financial products, including bank deposits, bonds, stocks, mutual funds, and ETFs, households can effectively channel their funds into the economy.
To fuel expansion, businesses can secure capital by issuing financial instruments like stocks and corporate bonds, or by investing in mutual funds and real estate projects Additionally, household capital can be leveraged by companies to fund new initiatives, enhance working capital, or acquire other businesses for growth.
Government policies play a crucial role in shaping capital allocation by promoting investment in key industries and start-ups through incentives, financial support, and regulatory measures Additionally, the Central Bank's interest rates and monetary policy significantly impact the accessibility and cost of capital, which in turn affects the investment choices of both businesses and individual investors.
Effective fund allocation requires entities to manage risk while pursuing high-return investment opportunities It's essential to recognize that capital allocation is a dynamic process, necessitating ongoing monitoring of portfolio performance, diversification of investments, and staying informed about market trends and economic conditions to adapt to fluctuations in capital markets.
Liquidity provision, risk protection, and policy
Liquidity, risk protection, and policy are crucial elements in capital markets that significantly impact investor and business performance As the capital market evolves, the importance of providing liquidity, safeguarding against risks, and implementing effective policies becomes increasingly vital.
Liquidity refers to the market's capacity to facilitate quick and easy asset transfers at fair transaction values A higher level of liquidity enhances market attractiveness for investors, allowing them to buy and sell assets swiftly and efficiently.
Ways of liquidity provision to capital markets include:
Financial instruments like Exchange Traded Funds (ETFs), mutual funds, and certificates of deposit play a crucial role in improving market liquidity by facilitating asset transactions.
● Set a minimum for maximum trading volume: Ensure trading is not too centralized and facilitate different investors' participation in the market.
● Defined circulation security system: Includes the technical infrastructure to process transactions and ensure the fast and secure transfer of financial assets.
Gathering data on financial asset trading, including price alerts, trading volumes, and timing, is a crucial strategy for enhancing market liquidity.
Risk protection is a crucial strategy for minimizing investment risks in capital markets Given that risk is an inherent aspect of these markets, implementing risk protection measures can significantly alleviate the unforeseen challenges faced by both investors and businesses.
Ways of risk protection in capital markets include:
● Risk assessment and management: Investors and companies need to assess potential risks when investing and manage them to minimize negative impacts
● Future contracts, options, bonds, and other financial products are secured by financial organizations such as banks or insurance companies to reduce risk and instill investor confidence.
● Training and skill development: Providing individual investors with the necessary knowledge and experience to identify risks and implement investment strategies can reduce risk.
● Profit generation and loss reduction: When investing, investors and companies should focus on profit generation and minimizing losses to achieve the best investment results.
Capital market policies are essential for fostering market development, boosting investor purchasing power, and ensuring market stability These policies play a crucial role in creating a conducive environment for investment and economic growth.
● Monetary policy: Apply monetary policies to control inflation, and maintain prices and market stability.
● Investment and development policy: Promoting investment and development in the capital market through incentive policies, such as tax incentives and support programs.
● Risk management: Risk management policies to ensure stability and safety for investors and capital markets.
● Information management policy: Applied to ensure the transparency and reliability of the information in the capital market.
Mobilization of foreign capital
Mobilizing foreign capital in the domestic capital market involves attracting investments from international investors, primarily through the issuance of securities like stocks and bonds This process can significantly benefit a country's economy by enhancing liquidity, fostering economic growth, and promoting technological advancements.
● Increased investment: Foreign investment in the capital market can increase the availability of funds for local businesses and entrepreneurs This, in turn, can spur economic growth and job creation.
Foreign investments play a crucial role in diversifying the domestic economy by introducing new industries and sectors that are often absent in the local market This diversification helps mitigate the country's reliance on a limited number of dominant industries, fostering economic resilience and stability.
● Access to expertise: Foreign investors often bring with them expertise and knowledge of global best practices, which can be valuable for local businesses and entrepreneurs.
The influx of foreign investors into the capital market enhances liquidity, facilitating companies in raising capital through securities sales However, this mobilization of foreign capital introduces risks, including currency fluctuations, political instability, and shifts in global economic conditions Consequently, it is crucial for countries to establish robust regulatory frameworks and effective risk management systems to mitigate these potential challenges.
Overview of Capital Market in Vietnam
Brief history of capital market in Vietnam
Overview of the Vietnamese Capital Markets
The capital market in Vietnam began its development in the early 1990s with the government's Doi Moi economic reforms, transitioning the country from a centralized economy to a market-oriented one A significant milestone was the establishment of the Ho Chi Minh City Securities Trading Center in 1995, which evolved into the Ho Chi Minh City Stock Exchange (HOSE) in 2000.
The capital market began as a small sector dominated by a few state-owned enterprises However, due to ongoing economic growth and government initiatives to foster private businesses, it experienced rapid expansion A significant milestone occurred in 2005 with the establishment of the Hanoi Securities Trading Center, which later evolved into the Hanoi Stock Exchange (HNX).
In 2006, Vietnam became a member of the World Trade Organization (WTO), boosting foreign investment and advancing its capital market The following year, the government enacted a new securities law that established a legal framework for capital market operations, facilitating the introduction of new financial instruments and participants.
Picture 1: The development history of the Vietnamese stock market
Vietnam's capital market has experienced notable transformations in recent years, marked by the introduction of innovative financial products like derivatives and a surge in foreign investor participation As of 2021, over 700 companies are listed on the two exchanges, boasting a combined market capitalization exceeding $250 billion The government actively supports the capital market's development to foster economic growth and enhance foreign investment attraction.
Current status and development of capital market in Vietnam
The legal framework governing the capital market has seen significant enhancements aimed at strengthening the restructuring of credit institutions and addressing market violations Key improvements focus on increasing transparency, enforcing market discipline, and elevating supervisory standards, while aligning more closely with international practices and commitments These efforts are designed to accelerate the development of the capital market, ensuring the overall safety and stability of the financial system Important legal and institutional documents play a crucial role in this ongoing progress.
Resolution 42/2017/QH14 of the National Assembly and Decision No 1058/QD-TTg from July 19, 2017, aim to pilot the settlement of bad debts within credit institutions These initiatives enhance the awareness and responsibility of both customers and credit institutions in adhering to legal regulations, thereby ensuring system safety Ultimately, they contribute to the financial and monetary stability of the nation's banking sector.
The stock market experienced significant growth, with rapid increases in market size observed between 2016 and 2017, as well as from 2020 to 2021 By June 2022, the market capitalization soared to VND 7.8 million billion, representing 78.16% of the country's GDP.
In 2015, Vietnam's stock market capitalization was 2.1 million billion VND, representing 41.8% of the country's GDP By the end of that year, stock market capitalization surged to 6.2 million billion VND, reflecting a remarkable increase of approximately 340% Additionally, the bond market capitalization rose to 1.6 million billion VND, marking an impressive growth of 111% since the end of 2015.
Chart 1: Stock market capitalization and credit scale in the period 2015 - 2022
As the variety of financial products expands, the level of diversification in banking, securities, and insurance markets improves significantly Numerous new products and services have emerged to meet the growing and diverse needs of customers and investors Notably, there is a strong trend towards technology integration, driven by the increasing application of information technology in the financial sector In particular, credit institutions are investing heavily in technology infrastructure to transition from traditional banking models to digital banking solutions.
Between 2016 and June 2022, the stock market experienced significant growth, with the number of listed companies rising from over 1,100 to more than 1,600 stock codes and fund certificates This expansion led to a diversification of investment products, including open-end funds, member funds, ETFs, and real estate investment funds (REITs), catering to various investment and hedging needs The derivatives market was introduced in August 2017 with the launch of the VN30 index futures contract, followed by the official trading of covered warrants in June 2019.
The financial health of institutions remains robust and stable, with successful restructuring of weak credit entities and effective bad debt resolution The credit system has mitigated risks of failure, while banks have enhanced their capital adequacy in alignment with international standards, evidenced by 26 out of 35 domestic commercial banks adhering to Circular 41/2016/TT-NHNN by June 2022 State-owned banks have seen a reduction in capital concentration, fostering increased market competition Additionally, the restructuring of securities and fund management companies has led to improved asset quality, with 82 securities firms reporting total assets of VND 277 trillion—up 3.7 times since 2016—and a reduced problem debt ratio of 2.1%, down from 6.4% As of mid-2021, 46 fund management companies had a combined equity of VND 5.5 trillion and total assets under management reaching approximately VND 358 trillion, marking a significant increase.
The capital market fulfills those functions in Vietnam
Channel for Savings and Investment in Vietnam's Capital Market
4.1.1 Overview of savings and investment in Vietnam
Saving and investing are crucial financial concepts in Vietnam, where saving is deeply embedded in the culture and viewed as a primary strategy for safeguarding against future uncertainties Despite this, many Vietnamese individuals lack the habit of investing and possess limited knowledge about various investment options.
Chart 2 Savings to GDP ratio of Vietnam (%)
Between 2011 and 2015, Vietnam's savings to GDP ratio averaged 29.88%, but from 2016 to 2020, this figure declined to an average of 29.27% Specifically, the savings to GDP ratios for each year were 29.58% in 2016, 29.12% in 2017, 29.20% in 2018, 29.40% in 2019, and 29.11% in 2020, indicating a gradual decrease over the years.
In 2021, the Covid-19 pandemic significantly impacted people's finances, leading to a notable shift where bank deposits from corporate and institutional clients surpassed those of individual customers for the first time The economic strain of the pandemic has left individuals with limited savings, highlighting the financial challenges faced during this period.
Since the start of 2022, the banking system has seen an influx of VND 103,000 billion from the public, marking a 1.95% increase from 2021 This rise in term deposit interest rates has successfully drawn in numerous investors.
Chart 3 Asset accumulation rate in GDP of Vietnam (%)
Between 2016 and 2020, the proportion of accumulated assets in GDP showed a declining trend, with figures of 26.58% in 2016, 26.53% in 2018, 26.84% in 2019, and 27.01% in 2020 The average for this period was 26.73%, which represents a decrease of 0.8 percentage points compared to the 2011-2015 average of 27.53% This indicates a gradual reduction in the share of accumulated assets within the economy over these years.
Between 2016 and 2019, the growth rate of accumulated assets showed a consistent upward trend, with increases of 9.71% in 2016, 9.8% in 2017, 8.22% in 2018, and 7.91% in 2019 The average annual growth rate for accumulated assets during this period was 8.91%, driven by a 9.26% annual increase in fixed assets and a 5.32% annual rise in inventory.
Chart 4 Accumulated asset growth rate for the period 2016 - 2019 (%/year)
Compared to other countries in ASEAN, Vietnam's asset accumulation growth rate in the period 2016-2019 is only behind the Philippines (11.2%) and higher than Indonesia (5.4%); Malaysia (1.2%); Singapore (3.9%); Thailand (4.9%).
The Covid-19 pandemic significantly impacted asset accumulation in 2020, resulting in a modest increase of only 4.12%, the lowest growth rate since 2013 This decline reflects a shift in focus towards disease prevention and control, contrasting with the average annual growth rate of 7.93% from 2016 to 2020, which surpassed the 3.61% growth rate observed from 2011 to 2015.
Some popular types of investment in Vietnam include:
Ownership investing involves acquiring assets such as stocks, start-ups, real estate, and antiques, offering the potential for significant returns While this investment strategy can be straightforward and accessible, it also presents a considerable level of risk that investors must carefully consider.
Stock investment is a popular form of indirect investment that allows individuals to buy securities and gain ownership of a portion of a company's assets This investment channel is characterized by its flexibility, enabling quick buying and selling, particularly with listed stocks With low capital requirements, anyone can participate in the stock market, making it accessible to a wide range of investors The primary advantages include the ability to utilize idle capital, potential for quick profits when investing strategically, and opportunities for long-term growth with the right stock selections However, investors should be aware of the stock market's inherent unpredictability, influenced by various factors such as domestic and global economic conditions, business performance, investor sentiment, and political events.
Starting a business involves investing a significant amount of money to establish and operate a company, making it a challenging form of investment Success in this venture depends not only on the financial commitment but also on the growth potential of the products or services offered.
Investing in antiques, including paintings by renowned artists, is considered a form of ownership investment that requires substantial knowledge and significant capital In Vietnam, this investment avenue is often viewed more as a hobby for the affluent rather than a serious financial strategy.
Real estate investment encompasses various profitable opportunities, including houses, apartments, and rental properties Recognized for its stability and high returns, this sector attracts multiple stakeholders, including brokers, landowners, and regulatory authorities.
This form of investment is more stable than an equity investment Accompanied by risk, loan investment does not bring much return Investment loans include: savings and investment in bonds.
If you have idle money and prefer a low-risk investment option with modest returns, consider a bank savings deposit This investment typically requires a long-term commitment to yield profits and is regarded as a safe and stable choice However, one must be aware of the inflation risk, which can erode the currency's value over time.
Bond investments involve purchasing bonds issued by companies, where investors lend money in exchange for a promise to repay the principal on a specified due date While this investment strategy can offer returns, it carries risks including fluctuations in interest rates, inflation, and potential low liquidity.
Investing in gold is one of the oldest forms of investment, appealing to those who wish to save and accumulate wealth without facing significant risks Contrary to the belief that substantial capital is required, individuals can start investing with smaller amounts by purchasing small gold bars after receiving their salary This gradual accumulation allows for effective investment over time, making gold a viable option for those with limited capital who seek a secure investment channel.
Allocation of Capital Resources in Vietnam's Capital Market (Linh)
4.2.1 Overview of capital allocation in Vietnam
In Vietnam, the growing demand for investment has led individuals and small business owners with surplus capital to lend money to enterprises through stock market investments This approach effectively allocates capital, alleviates pressure on banks, and addresses the funding shortages faced by both small and large businesses in the country.
Recently, Vietnamese enterprises have faced significant challenges due to a lack of capital, leading to unprecedented difficulties Issues with cash flow, particularly concerning working capital and medium to long-term investment, have placed businesses—especially private enterprises in Vietnam—into urgent and precarious situations.
On November 12, the Head of Department Truong Gia Binh, Chairman of FPT Corporation, submitted a report from Committee IV of the Private Economic Development Research Board to Prime Minister Pham Minh Chinh The report highlights challenges that are impacting the competitiveness of various industries and sectors within the domestic economy.
According to Board IV, the primary challenge facing the private business sector is accessing capital necessary for sustaining production and operations This issue has intensified as many businesses experience depleted cash flow following over two years of the epidemic.
In a report submitted to the Prime Minister, Board IV identified various industries facing unprecedented challenges in production and business operations, primarily due to a significant lack of capital.
Steel companies are currently experiencing a significant crisis due to an oversupply in the market, leading to a sharp decline in both export and domestic orders As a result, many businesses are forced to sell their products at prices 30-40% below cost to maintain cash flow, all while facing high interest expenses and awaiting the next round of credit allocation.
Businesses in supporting industries once relied on signed contracts or mortgage real estate to secure capital, but due to increased pressure on credit availability, banks are now reluctant to disburse loans As a result, these businesses are unable to accept or sign new contracts.
In certain demanding markets, customers are increasingly expecting Vietnamese enterprises to enhance their scale, environmental sustainability, and product quality However, the lack of capital prevents these companies from investing in the necessary new machinery and technology, putting them at risk of losing their competitive position in the supply chain.
Agricultural enterprises in Vietnam face challenges due to insufficient capital for purchasing raw materials, particularly during the concentrated procurement period at the end of the year and early 2023 The urgency of this procurement, coupled with the significant capital required, hampers their ability to compete effectively with foreign-invested enterprises (FDI), as access to credit remains limited for these local businesses.
Many building material companies have halted the majority of their supply contracts due to a lack of cash flow from investors, who are unable to make payments or secure bank loans This stagnation in public investment construction projects has led to a significant crisis for these businesses.
Along with that, the challenge of maintaining medium and long-term capital mobilization channels to expand investment and business recovery is also a big problem for businesses.
The decline in market confidence in real estate firms has adversely impacted various sectors, hindering the bond mobilization channel's ability to attract investors and address urgent business challenges in the short term.
The stock market's downturn has exacerbated the capital challenges faced by enterprises, prompting many large companies to secure funding for bond buybacks ahead of maturity Amid low market confidence and a shortage of working capital and investment flows, businesses risk asset liquidation Reports indicate a potential surge in Vietnamese enterprises selling factories and production facilities to foreign investors, particularly with Thai companies actively negotiating purchases in the textile and manufacturing sectors.
4.2.2 How capital market in Vietnam facilitates capital resources allocation
Vietnam's capital markets facilitate efficient capital allocation by offering financial instruments like stocks, bonds, and securities, enabling companies and institutions to raise significant funds This mechanism allows them to secure larger amounts of capital compared to traditional bank loans, enhancing their financial capabilities for growth and investment.
Vietnam's capital markets enhance capital allocation by offering a variety of financial products, including investment funds and financial insurance These investment options, such as ETFs and mutual funds, enable investors to diversify their portfolios and mitigate risks associated with different financial instruments.
In addition, the capital market in Vietnam also supports capital allocation by enabling listed companies to raise larger amounts of money through additional share issuance.
The capital market in Vietnam plays a crucial role in facilitating capital allocation through various financial instruments, including stocks, bonds, and other financial products These instruments enable companies and institutions to effectively raise and utilize capital, fostering diversification and mitigating investment risks.
Providing Liquidity, Risk Protection, and Policies in the Vietnamese Capital Market
4.3.1 Overview of Liquidity Provision, Risk Protection, and Policies in the Capital Market of Vietnam
4.3.1.1 Overview of Liquidity Provision in the Capital Market
In an economic crisis, financial institutions can help restore the economy by strengthening risk and liquidity management, liquidating problematic assets, and enhancing capital adequacy ratios.
Evaluating the policies and operations of the Central Bank is essential for mitigating liquidity and credit risks within financial institutions, particularly in lending and payment system management The Central Bank plays a vital role by offering insights into currency dynamics and their influence on overall market liquidity, as well as the liquidity status of financial entities.
➔ The Central Bank can influence interest rates and the overall funding of the financial market to maintain price stability and the stability of the financial system.
4.3.1.2 Overview of Risk Protection in Capital Markets
The derivative stock market serves not only as an investment avenue but also as a crucial risk management tool for the underlying stock market During significant downturns in the underlying market, derivatives help alleviate selling pressure, thereby stabilizing investor sentiment and mitigating the extent of the market decline.
During periods of significant volatility in the underlying market, such as the Covid-19 pandemic, empirical data indicates that liquidity in the derivative market tends to rise This phenomenon serves as a self-adjusting mechanism, contributing to the stabilization of investor sentiment and reassurance in the market.
4.3.1.3 Overview of Policies in Capital Markets
Stock market indicators provide a precise reflection of economic dynamics, with rising stock prices signaling increased investment and economic growth, while declining prices suggest negative trends in the economy.
The stock market serves as a crucial instrument for the government in executing macroeconomic policies It enables the government to buy and sell government bonds, generating revenue to mitigate budget deficits and control inflation Furthermore, through targeted policies and measures, the government can influence the stock market to promote balanced economic growth.
4.3.2 The current situation of liquidity Provision, risk protection, and policies in the capital market in Vietnam
4.3.2.1 The situation of liquidity Provision in the capital market in Vietnam a Market share
In 2020, Vietnam's capital markets faced a sharp decline due to the COVID-19 pandemic, leading to significant capital withdrawals by foreign investors However, by the end of the year, the market stabilized and experienced a remarkable recovery, with the VN-Index rising by 14.9% from the start of the year and 67% from its lowest point Additionally, stock market liquidity surged, averaging nearly VND 7,400 billion per session, with November and December seeing averages of VND 10,000 billion and VND 14,800 billion, respectively—more than double the average of 2019.
The capitalization of the stock market reached 84.3% of GDP in 2020, and the total capital raised through the stock market reached VND 384 trillion, an increase of 20% compared to 2019.
Vietnam's capital markets have demonstrated impressive resilience in overcoming the challenges of the COVID-19 pandemic, showcasing a robust recovery characterized by record-high liquidity and increased engagement from a new wave of investors, surpassing all expectations.
In 2022, the Ho Chi Minh Stock Exchange (HOSE) anticipates an average trading volume of 653.96 million shares per session, alongside an average trading value of VND 17,004 billion per session This reflects a decline of 11.30% in trading volume and a significant 21.24% drop in trading value compared to the averages recorded in 2021.
Table 1 Top 5 stocks traded in the month.
In December 2022, the stock market experienced significant growth in liquidity, with average trading volumes exceeding 807.29 million shares and average trading values reaching VND 14,078 billion This marked an increase of 16.42% in trading volume and 23.05% in trading value compared to November 2022.
Picture 2 The stock market liquidity recorded in 12/2022
In the month, the total trading volume of stocks reached 17.76 billion shares, with a trading value of VND 309,816 billion, reflecting an increase of 16.42% in average trading volume and 23.06% in average trading value compared to November.
In 2020, the bond market featured 477 listed bond codes, comprising 454 government bonds and 23 corporate bonds, with a total listed value of VND 1,388,000 billion This marked a significant increase of 16.8% from the end of 2019, representing approximately 23% of the country's GDP.
Trading liquidity in the bond market continued to grow strongly, with an average of over VND 10,393 Vietnamese Dong per session, an increase of 13% compared to 2019.
As of December 2022, the Vietnamese bond market featured 450 listed bond codes, comprising 391 government and local authority bonds and 59 corporate bonds The total listed value exceeded 1,743 trillion Vietnamese dong, marking a 12.9% increase from 2021 and representing 20.6% of the country's GDP.
The Vạn Thịnh Phát bond incident has caused a significant capital flow blockage, leading to a sharp decline in market liquidity In the fourth quarter of 2022, average liquidity plummeted to 10,351.4 billion Vietnamese Dong per session, down from 24,203.6 billion Dong in the first quarter, marking a staggering decrease of 57.2% By December 2022, liquidity further fell to just 5,500 billion Dong per session.
Total capital mobilization on the stock market in 2022 reached VND 351,831 billion, down 22% compared to 2021.
Government bond futures have seen a notable increase in liquidity since 2021, with 111,088 five-year and 10,000 ten-year government bond futures contracts traded, despite still being lower than index futures.
After 3 years of operation, the derivatives market has grown very well, exceeding the expectations Trading volume on the derivatives market has a strong growth rate, in the first 7 months of 2020 reached over 165,000 contracts/session, an increase of 86.5% compared to
2019 and 15 times higher than that of the first year of market opening (an average of nearly 11,000 contracts/session).
Trading on the market is particularly active whenever there is strong volatility in the underlying market Liquidity continuously sets new records, with the latest record being
356,033 contracts on July 29, 2020, a figure that many developed markets take decades to achieve.
Mobilizing foreign capital in Vietnam's capital market
4.4.1 Overview of mobilizing foreign capital in Vietnam's capital market
The capital market not only mobilizes idle domestic funds but also significantly attracts foreign investment, particularly in the form of foreign portfolio investment (FPI) Since the 1990s, there has been a notable shift in international capital, moving beyond traditional financial instruments and commercial banks as the sole intermediaries A substantial portion of global capital flows is now directed towards international stock and bond portfolios, a trend that is set to continue growing Consequently, the stock market has emerged as a crucial avenue for leading investment capital.
The Vietnamese stock market has evolved over 18 years, featuring diverse participants, particularly a crucial group of investors This market comprises both domestic and foreign investors, with Foreign Portfolio Investment (FPI) significantly contributing to its growth and to Vietnam's socio-economic development.
4.4.2 The status of mobilizing foreign capital in Vietnam's capital market
4.4.2.1 Mobilizing indirect foreign investment (FPI) through the stock market.
Since 2016, foreign portfolio investment (FPI) capital flows have shown a significant recovery and increase, particularly between 2017 and 2019 However, in 2020, the COVID-19 pandemic and substantial volatility in global financial and monetary markets led to a sharp decline in FPI capital flows.
Unit: billion VND Table 3: Value of foreign investors' transactions on the stock market from 2016-2020
In recent years, the trading scale of foreign indirect investors has remained low relative to the overall stock market, exhibiting significant fluctuations For instance, in 2011, Foreign Portfolio Investment (FPI) comprised just 12.2% of the market, with minimal changes from 2012 to 2018 By 2019, FPI's share increased slightly to 14.1%, highlighting the ongoing volatility in foreign investment participation.
Chart 8 Percentage of foreign investors' trading value in the securities market from 2011-2019
Between 2017 and 2019, Vietnam experienced a significant increase in Foreign Portfolio Investment (FPI), reflecting strong foreign investor confidence in the nation's growth potential However, in 2020, this trend reversed due to unprecedented fluctuations in global and regional financial markets, largely driven by the COVID-19 pandemic, which introduced numerous unpredictable risks.
4.4.2.2 Mobilizing FPI Capital through Bond Issuance
Through more than 35 years of opening up and integration into the global economy, Vietnam has gradually accessed international capital sources through the issuance of bonds in foreign countries.
As of Q4 2021, Vietnam's outstanding bonds surpassed 4.4 billion USD, reflecting a significant increase from the average of over 3.2 billion USD over the past decade, which has grown at an annual rate of approximately 5% This trend highlights Vietnam's efforts to attract and diversify foreign capital to address its constrained domestic funding sources.
Source: BIS (2022) Chart 9 Value of Vietnam's international bonds outstanding, 2009-2021
The organizational structure of Vietnam's international bond issuance has undergone significant changes in the past decade Previously, the international bond market was mainly a
“playground” for the government to seek foreign capital However, this trend has completely changed.
From 2012 to 2017, the Vietnamese government was the primary issuer of international bonds, representing more than 70% of the total issuance during this period By 2017, nearly all of the international bonds in circulation in Vietnam were government bonds, highlighting the government's dominant role in the country's bond market.
Since 2018, there has been a notable shift in Vietnam's international bond market, with the government's share of mobilized international capital declining from 75% in 2018 to just 28% in 2021 During the same period, financial and non-financial institutions have emerged as the primary issuers, reflecting a significant change in the landscape of international capital in Vietnam.
Vietnam has seen a remarkable increase in opportunities for non-financial organizations in its international bond issuance, with their share rising from 13% (USD 513 million) in 2019 to 31% (USD 1.355 billion) in 2021 Simultaneously, the value of outstanding bonds issued by financial organizations surged from USD 234 million in 2017 to USD 1.813 billion in 2021, representing 41% of the total value of international bonds in the country.
Chart 10 The proportion of Vietnam's international bonds outstanding by issuer, 2012-2021.
Challenges and Opportunities for Vietnam's Capital Market
Challenges facing Vietnam's capital market
The capital market structure remains relatively small compared to regional markets, with an imbalance among its components As of June 30, 2022, the stock market capitalization was approximately 70.9% of GDP, significantly lower than that of other regional markets, which range from 93% to 243% of GDP, excluding Indonesia Notably, around 35% of the total market capitalization is state-owned, resulting in limited ownership and liquidity Furthermore, the outstanding debt in the bond market, at 47% of GDP, is considerably lower than that in the stock market and several regional counterparts.
Chart 11 Market capitalization of domestic listed companies by the end of 2020 (% of GDP)
- Goods on the capital market are still lacking in variety, and the quality of some products is not guaranteed Listed companies in highly cyclical industries such as finance
The banking, securities, and insurance sectors, along with real estate and construction, represent approximately 65% of total market capitalization and stock market liquidity However, there is a notable lack of listed companies in technology, healthcare, logistics, and services sectors.
Several enterprises have recently raised capital just before going public, utilizing stock market funds for inappropriate purposes, leading to unpredictable stock price fluctuations that do not reflect their actual business performance Additionally, numerous state-owned enterprises have undergone equitization but have yet to be listed on the stock market.
In addition, financial derivatives products, although having rapid development, and exceeding expectations, are not diversified and lack options for investors (call options, put options, contract futures, etc).
The domestic investor base remains limited, failing to connect the long-term capital mobilization capabilities of the capital market with the insurance and social security systems Individual investors dominate the stock market, comprising approximately 80-85% of transactions, with most opting for self-directed investments rather than relying on professional investment funds This trend significantly impacts the sustainability of the VN Index, which has experienced some of the highest fluctuations among global stock indices.
Between 2020 and 2022, the number of individual investor accounts surged; however, many of these accounts remained inactive or had minimal transactions The domestic institutional investor landscape also lacks significant contributions from long-term pension funds and insurance companies To address this, the Strategy for Development of Vietnam's Stock Market (2011-2020) aims to establish a suitable legal framework and financial policies to foster the growth of investment institutions Nevertheless, the current legal foundation is inadequate to effectively promote and support the development of pension funds.
Despite progress, market disclosure practices still face significant shortcomings, as evidenced by the discrepancies between unaudited and audited financial statements of numerous listed companies Key financial items often lack full transparency, with some being audited under exceptions Additionally, reports on the utilization of mobilized capital are not comprehensively disclosed, hindering the ability of shareholders, bondholders, and regulatory agencies to effectively monitor capital usage Furthermore, violations in the disclosure of transaction information by major and internal shareholders remain prevalent, driven by potential profit motives and the acceptance of penalties that are considerably lower than the gains made by those involved.
Public corporate governance faces certain challenges, particularly regarding compliance with regulations concerning independent Board of Directors (BOD) members Many enterprises still lack adherence to these regulations, resulting in a situation where individual BOD members are not fully independent from the Board and other members.
Directors can sometimes violate the interests of the company and its shareholders by establishing companies that they control, which can lead to the diversion of revenue, profits, or customers away from the original company Additionally, there may be instances of opaque loans involving members of the Board of Directors and Management, further compromising the company's financial integrity.
Vietnam's stock market has struggled to meet the criteria for upgrading to an emerging market status, remaining on the upgrade list for the past five years with slow, and sometimes negative, progress In June 2022, MSCI downgraded nine qualitative criteria for the Vietnamese market, highlighting significant issues such as restrictions on foreign ownership in public and listed companies, limited access to information due to insufficient English disclosure by these entities, and shortcomings in securities settlement and clearing processes, including the requirement for pre-funding in transactions and the absence of an official clearing organization.
The reliability of intermediary organizations, such as securities firms, auditing companies, and valuation agencies, is often questionable, as they frequently fail to meet transparency and appraisal standards necessary for accurately assessing chemical goods quantities in the market Instances have been reported where securities firms involved in corporate bond issuance, auditing companies reviewing financial statements of publicly listed enterprises, and valuation firms assessing security assets exhibit collusion with issuers This unethical behavior includes providing misleading information about a company's operational and financial status, often stemming from conflicts of interest due to the close relationships between intermediary organizations and securities issuers.
Opportunities for Vietnam's capital market
- Stable economic growth: Vietnam has had many consecutive years of economic growth above 6%, this is a strong point and a basis for the development of the capital market.
Vietnam is projected to achieve an economic growth rate of approximately 6.5% by 2023, according to forecasts from the World Bank and the Asian Development Bank The country has significantly contributed to regional economic stability and development, with robust growth in key industrial sectors such as electronics, information technology, automobiles, and food processing Additionally, Vietnam is expanding into emerging fields, including renewable energy, digital transformation, supporting industries, cloud computing, and e-commerce.
- Financial policy reform: The government has made many financial policy reforms, especially to create more favorable conditions for businesses to access capital through capital markets.
By the end of 2022, Vietnam's Ministry of Finance has made many achievements in reforming financial policies to promote the development of capital markets:
The collective efforts of the political system in implementing effective epidemic control measures and supportive fiscal and monetary policies have significantly contributed to the socio-economic recovery As a result, the economy has shown positive signs, with GDP growth reaching 8.83% over the past nine months, the highest in 11 years, and an estimated annual increase of 8% Additionally, import-export turnover has hit 730.28 billion USD, leading to a trade surplus exceeding 11 billion USD Production and business activities are steadily regaining momentum and transitioning into a new normal.
The socio-economic recovery and development program aims to assist businesses and individuals in overcoming challenges While tax exemption, reduction, and extension policies have led to decreased revenue, their implementation has positively influenced the maintenance and expansion of production and business activities This, in turn, has boosted demand for goods and services, ultimately enhancing budget revenues.
The Ministry of Finance is actively enhancing the national single window and ASEAN single window initiatives, overseeing the efficient operation of the VNACCS/VCIS automated customs system to reduce costs for both individuals and businesses.
Tax and customs authorities have made substantial strides in enhancing collection management, intensifying inspections and examinations, and rigorously addressing instances of tax evasion and commercial fraud.
Notably, in 2022, the Ministry of Finance operated the cross-border e-portal, 42 foreign suppliers declared and paid taxes, with a total tax paid of 3.44 trillion VND.
I am boosting budget revenue from real estate transfer, estimated to reach more than 41 trillion dongs in 2022, an increase of about 97% compared to 2021 (more than 20 trillion dongs).
In 2023, the Ministry of Finance will focus on implementing key financial policies aligned with the Party's guidelines and the resolutions of the National Assembly and Government to support socio-economic recovery, control inflation, and ensure macroeconomic stability This includes reviewing and amending tax laws in line with the Strategy on Tax System Reform to 2030, while also providing support to businesses and individuals to enhance their resources for upcoming challenges Additionally, the Ministry will proactively assess spending needs, restructure state budget expenditures, and improve the legal framework for price management, ensuring flexible price management based on market supply and demand forecasts.
The Ministry of Finance is committed to stabilizing and developing a transparent, safe, and sustainable capital market by enhancing the legal and institutional framework, increasing supervision and law enforcement efficiency, and strengthening communication to build investor confidence.
Signing free trade agreements: Vietnam is actively participating in free trade agreements.
This is an opportunity for Vietnamese businesses to access major markets and attract capital from foreign investors:
The Free Trade Agreement between Vietnam and the Eurasian Economic Union (EU-Vietnam FTA) is a significant milestone for Vietnam, set to be signed and effective from August 2023 This agreement is poised to create numerous opportunities for Vietnamese businesses to enter the European market, while also fostering Vietnam's economic development and reform.
The UK-Vietnam Free Trade Agreement (UKVFTA), effective from January 1, 2021, post-Brexit, aims to enhance trade relations by committing to tax reductions and improving market access for Vietnamese products in the UK.
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a multilateral trade agreement involving 11 countries, including Vietnam, Japan, Canada, Australia, New Zealand, Singapore, Malaysia, Brunei, Peru, Chile, and Mexico Effective from December 30, 2018, the CPTPP aims to lower tariffs and facilitate market access for goods and services among member nations.
Free trade agreements present significant opportunities and challenges for Vietnam's capital market On the positive side, these agreements enhance market access for Vietnamese businesses and contribute to an improved investment climate, thereby attracting foreign direct investment (FDI) into the country.
Vietnam is emerging as a key manufacturing and processing hub for various industries, including electronics, automobiles, pharmaceuticals, and agriculture This growth presents significant opportunities to attract international investment, positioning Vietnam as an appealing destination for foreign investors seeking to tap into its expanding industrial landscape.
By 2025, Vietnam aims to achieve a well-structured industrial development that enhances competitiveness and integration The focus will be on adopting modern technology and participating in global value chains across various sectors This initiative seeks to fulfill the economy's demands and boost exports while ensuring a skilled workforce is available to support modern production needs.
By 2035, Vietnam aims to advance its industry across various sectors through the adoption of cutting-edge technology and adherence to international quality standards The country seeks to integrate deeply into the global value chain while promoting energy efficiency and fostering fair competition in the context of international integration Additionally, Vietnam is committed to cultivating a professional, disciplined, and highly productive workforce that actively engages in research, design, and manufacturing processes.
The specific objectives for industrial growth include achieving an annual growth rate of 7.0-7.5% for added value from 2021 to 2025, and 7.5-8.0% from 2026 to 2035 Additionally, the growth rate for industrial production value is targeted at 11.0-12.5% per year during the 2021-2025 period, followed by a projected rate of 10.5-11.0% from 2026 to 2035.
Striving to 2025, the proportion of industry and construction will account for 43-44% and by
Conclusion
Summary of the principal functions of the capital market
The capital market is the place where financial instruments such as stocks, bonds, securities and other financial products are traded The main functions of capital markets include:
Capital markets serve as essential channels for both savings and investments, allowing individuals and organizations to invest in potentially profitable companies and projects while also providing a means to save effectively.
Capital allocation in capital markets plays a crucial role by directing funds from individuals with consumption needs to those seeking investment opportunities This process effectively pools capital from diverse sources and channels it into promising companies or projects, fostering economic growth and innovation.
Provide liquidity: Capital markets provide liquidity to investors, allowing them to buy and sell securities easily and quickly.
Risk and policy protection: Capital markets have mechanisms to protect participants from risks and ensure compliance with government regulations and policies.
Mobilizing foreign capital: The capital market is an important channel to mobilize foreign capital into the economy, helping to enhance the competitiveness of enterprises and the economy in general.
Capital markets are essential for the allocation and distribution of capital, facilitating price formation and financing economic growth They also play a crucial role in managing financial risks, thereby contributing to overall economic stability.
Future prospects of Vietnam's capital market
The future prospects of Vietnam's capital market are huge and attractive Here are some reasons to believe that Vietnam's capital market will thrive in the future:
Economic growth: Vietnam is one of the countries with the fastest economic growth in
Southeast Asia This growth rate will be the driving force for capital mobilization and investment attraction in the capital market.
Vietnam's capital market is experiencing growth due to the expansion of domestic enterprises As businesses increase their operational scale and enhance product quality, there is a rising demand for capital to support further development.
Vietnam's real estate market is experiencing robust growth, characterized by the implementation of numerous large-scale projects This dynamic sector plays a crucial role in capital mobilization and significantly boosts liquidity within the capital market.
The Vietnamese government is actively enhancing the capital markets by implementing supportive policies and improving the overall business environment These initiatives aim to attract foreign investment and foster increased competition within the capital markets.
Technological advancement: Vietnam's capital market is transitioning to electronic trading systems, improving transparency and ensuring transaction safety This will help improve operational efficiency and liquidity in capital markets.
Vietnam has outgrown the Marginal Market group, prompting the Government to take decisive actions to safeguard investors, which is essential for transitioning to a developed market and attracting substantial domestic and foreign investments Despite a correction in the stock market following historical highs in the VN-Index, positive cash flow signals indicate opportunities for long-term investors The US Federal Reserve's aggressive interest rate hikes have led to increased rates on the US dollar and government bonds, resulting in a global net selling of foreign capital However, in April, foreign investors significantly net purchased shares, particularly during periods of steep declines in the VN-Index, marking a pivotal moment for Vietnamese stocks.
Vietnam's stock market has experienced a significant adjustment, leading to a decrease in the valuations of key sectors, including banking, energy, real estate, construction, retail, and consumer staples This decline has created a more attractive entry point for investors looking to capitalize on these lower prices.
The Vietnamese stock market presents an attractive opportunity for long-term investment, with a price-to-earnings (P/E) ratio of 11.5 times in 2022, significantly lower than the five-year average of 14.5 times This suggests that the market is well-positioned to navigate short-term challenges and is expected to show positive growth for the remainder of 2022.
In the long term, both the stock and bond markets offer significant growth potential for investors A representative from the World Bank highlights that Vietnam's market size has expanded beyond the Marginal market category, with its equity market now comprising over 30% of the MSCI Global Marginal Market Index This situation can be likened to a middleweight boxer competing in the lightweight division, underscoring Vietnam's readiness to transition to a higher market status.
The Vietnamese government's recent initiatives are essential for elevating the stock market to Emerging Market status, enhancing its quality and appeal to significant international investors This transition could potentially attract an additional $10 billion in new indirect investments, with an estimated influx of $2-5 billion in the first year alone.
Vietnam's capital market holds significant potential for future development, but to achieve sustainable growth, it requires support from the government as well as domestic and foreign investors The government must implement favorable policies to attract investment and foster a healthy business environment Additionally, enhancing the competitiveness of domestic investors is crucial for creating added value in capital-raising efforts.
To enhance liquidity in the capital market and enable businesses to raise capital efficiently, it is essential to strengthen collaboration among investors, businesses, and financial institutions.