Speculative cash flows: an imminent threat to financial stability

Customers at Vietinbank's branch in Hà Nội. — VNA/VNS Photo Trần Việt

Việt Nam’s benchmark VN-Index ended Friday at 1,479 points and is marching towards a new record high of 1,500 points. HCM City's index has gained 32 per cent this year and the HNX-Index on the Hà Nội Stock Exchange even soared 120 per cent.

The stock market has been setting new records this year despite strong pestment of foreign traders and growing concerns of an asset bubble that could endanger the stability of the financial market.

An asset bubble occurs when the price of an asset, such as stocks, bonds, real estate, or commodities, rises at a rapid pace without underlying fundamentals, such as equally fast-rising demand, to justify the price spike.

In the bleak background of the economy, what surprised many investors is the huge increase in the liquidity of the stock market with the trading value reaching VNĐ30 trillion (US$1.3 billion) per session, a burst from a daily average of VNĐ6 trillion-VNĐ8 trillion in the previous year. This number even surpassed the liquidity of other emerging markets in the region such as Malaysia or Indonesia.

The latest data of the State Bank of Việt Nam showed the credit growth as of November 25 reached 10.1 per cent compared to the end of last year. This number was 8.7 per cent by the end of October. Thus, in November, commercial banks injected about VNĐ126.6 trillion into the market, nearly twice as much as in October and three times higher than in the middle of the year (August and September).

According to experts, rising credit growth is a positive signal showing that the economy is on the right track for post-pandemic recovery, along with November’s improved economic data.

However, the question is, will this credit flow really be disbursed to the right places? And more importantly, is credit capital flowing into financial markets instead of real economic activities?

If a large part of the credit is pumped into the securities market, it can be a big problem for the banking system and the whole economy once the stock market bubble breaks out.

China's stock market grew very quickly in early 2015 and crashed quickly in the latter half of the year, causing huge losses to inpidual investors. However, investors in China's stock market at that time did not have much to do with capital flows from the banking system.

Imbalance in credit growth structure

Data of S&P Capital IQ, the research arm of S&P Global, showed the cumulative increase in mobilised capital from the banking system of listed companies in the first three quarters was only VNĐ56 trillion (excluding businesses in the financial sector such as banks and securities firms).

It was estimated that loans provided to listed companies only increased by 3.9 per cent, while total credit in the whole system increased by 7.17 per cent in the same period. Listed enterprises are considered a big group of the economy, thus the slow and unbalanced growth of capital inflows in this group showed their pessimism about the outlook of the economy amid the unpredictable development of the pandemic.

During the pandemic, most of the small and medium enterprises (SMEs) with limited financial resources, were greatly affected. According to the General Statistics Office, in the first 11 months of the year, the number of SMEs registering for dissolution reached 106,400, compared to the number of newly-established enterprises of 146,100.

Bank credit is provided to three groups including large enterprises, SMEs and inpiduals. Statistics from the loan portfolios of the 10 largest commercial banks in Việt Nam showed that the growth of inpidual customers was about 7.46 per cent ending September. Thus, it can be seen that the credit growth of SMEs should have been much larger than the average to offset the low growth rate of listed companies as analysed above.

According to Lê Hoài Ân and Trần Viết Lảm, experienced financial analysts on thesaigontimes.vn, in the context that economic activities are still sluggish, it does not exclude the possibility that the bank capital to SMEs was disbursed into the stock market.

Besides, short-term financial investment activities of listed companies have also increased significantly in the past five quarters, despite the fact that the business capital flows are facing many difficulties in the last two quarters when the southern region's economy stalled due to social distancing.

The rapid decline in the stock market, if any, can make it difficult for inpidual investors to repay their loans, and also create potential bad debts on the financial statements of commercial banks. The banking industry accounts for a large proportion of the VN-Index and has been the pillar of the market. If the business took a hit and affected the prices of bank shares, it could have a domino effect on the entire market.

The analysts suggested it is time for the central bank to comprehensively assess the credit balance of the banking system to see if capital is being injected into real economic activities or not, and if necessary it needs to take intervention measures to ensure the safety of the banking system against any imminent bubbles.

Unlikely to explode next year

Experts forecast that the growth rate of the stock market will slow down as the Government may not "inject" new money through the economic stimulus package.

In a dialogue last week on the stock market prospects with the economic stimulus package, Dr. Quách Mạnh Hào, associate professor at University of Lincoln, UK, said the Government's economic stimulus package will aim to bring the money – which was already "pumped" into the market but not yet used – into infrastructure projects and social security to help promote economic recovery and limit inflation risks.

Hào said this will likely be done in the form of bond issuance to attract redundant and idle money sources available on the market.

"When the support package is officially announced and the economic engine starts to function normally, the stock market will have to compete with the Government in using society's money," Hào said.

He said investors may not expect the stock market to continue growing rapidly like this year. — VNS