Vietnam needs to be cautious about rising inflows of portfolio investment as the capital may come with risks attached, officials say.
Vice Chairman of the State Securities Commission Nguyen Doan Hung told Thanh Nien Weekly that portfolio investment inflows had recently increased to around US$6 billion.
"Compared with $124 billion in foreign direct investment in the past decade, the portfolio investment figure is quite small, but it has grown really fast considering it started at almost nothing around ten years ago," he said.
Portfolio investment has become more important to Vietnam, he said, pointing out that the flows improved market liquidity and pepped up the market.
However, the capital doesn't come trouble free.
"Portfolio investments mainly go into the stock and bond markets for the short term and can be withdrawn at any time. If there are no measures to control the flows, sudden capital withdrawal can cause the stock market to fall and lead to a foreign capital shortage."
Hung said the government had ordered the State Securities Commission, the State Bank of Vietnam and the Ministry of Planning and Investment to cooperate and supervise foreign portfolio investments.
It's necessary for them to join forces as the Securities Commission can only monitor Vietnam's two stock exchanges while many foreign funds now also invest in real estate and infrastructure, he said.
Hung's concerns are in line with what the Asia Development Bank said in a report published last month.
With the return of equity investment flows to the region, foreign participation in local equity markets appears to be on the rise in eleven economies of emerging Asia, including Vietnam, the Manila-based lender said in its annual Asia Capital Markets Monitor.
"The increased financial openness, however, may expose emerging Asian markets to the vagaries of global investors, such as a sharp reversal in portfolio investment flows, as well as various external risk factors," the report said.
"While the return of capital flows is welcome, surges in short-term capital inflows could potentially leave countries vulnerable to a sudden reversal in portfolio investment and to sharp currency movements," Srinivasa Madhur, senior director of the ADB's Office of Regional Economic Integration, said in a statement.
"Governments in emerging Asia should stay on guard and be ready to act if volatile capital inflows threaten to destabilize the region's financial markets," the ADB said.
Le Duc Thuy, chairman of the National Financial Supervision Committee, said the ADB and the World Bank used to warn emerging countries against taking steps to control foreign portfolio flows.
But everything has changed since the global financial crisis and international organizations now advise that control should be tighter over the flows, he said.
The withdrawal of foreign funds in 2008 has led to a 20 percent rise in bond yields and raised the foreign exchange rate to VND19,000-20,000 per dollar, Thuy told Thanh Nien.
"Vietnam can't say that this is unlikely to happen again. Given the current conditions, it's normal for capital flows to tumble without proper control."
The portfolio investment flows to Vietnam have in fact gone through many ups and downs.
Foreign investment funds began to enter the local market in 1991. As of 1997, there were seven of them in Vietnam with combined capital of $400 million.
But over the following five years five of them pulled out of the market completely and one divested 90 percent of its capital, leaving Vietnam Enterprise Investment Fund as the only foreign fund.
The return of foreign capital started in 2003, with inflows hitting the highest level in 2006- 2007, falling in 2008 and then rebounding late last year, Vietnam Investment Review newspaper said in a report last week.
The government has not established sound policies to facilitate foreign portfolio investment and that's why this type of investment has been treated with reserve, Chairman of the Securities Trading Association Le Van Chau was quoted in the report as saying.
"Unclear guidelines and inconsistent policies for portfolio investment not only cause difficulties for market management but also make foreign investors insecure," he said.