Vietnam's Stock-Market Madness

Thursday, Feb. 22, 2007 By KAY JOHNSON/HANOI Enlarge Photo
Amid Vietnam's boom, investors are rushing to load up on stocks
JULIAN ABRAM WAINWRIGHT FOR TIMEArticle ToolsPrintEmailReprints It's Friday night, and the back-alley Hanoi Internet caf� is buzzing with video-game warriors noisily slaying dragons. But Trung, a 26-year-old engineer, is there to make a killing of a different kind. Logging onto an Internet chat room dedicated to stock trading, he joins about 1,000 other Vietnamese with aliases like "warrenbuffet74" and "wallstreethanoi" who are in search of the day's hot deals. "I'm selling 13,000 shares of CavicoE," reads one message. "Price is 31,000 dong per share. Contact Manh." The next message reads: "Oh, what a pity. I just bought the same stock at 32,000—I wish I'd found you before." Trung (who asked not to be identified by his full name) chuckles and shakes his head. "These two are probably the same person using different nicknames to drive up the price," he explains. It's a tactic Trung knows well—he says he has used it himself. In his day job at a water utility, Trung earns just $300 per month, but since mortgaging his parents' house to raise capital last year, he claims to have raked in about $20,000 in profits from online share trading. "If you're clever," he says, "you can increase your money by five times in a few months."

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What's surprising about Trung is not his profit projections—just about everyone is giddy about Vietnamese investments these days—but where he's making his money. While the nation's fledgling official bourses in Hanoi and Ho Chi Minh City are surging, Trung and many other local punters prefer to invest where the action is even headier: he typically trades in an unsanctioned market composed of websites and Internet chat rooms frequented by thousands of investors who swap unlisted shares of partially privatized Vietnamese companies. Participants call this the over-the-counter (OTC) market, a reference to exchanges abroad that provide an arena for trading small stocks. But unlike OTC bourses elsewhere, Vietnam's market has no licensed brokers, virtually no regulatory oversight, and trades often culminate with the exchange of cash for paper shares at a local tea shop. Think of it as an amorphous eBay for speculators, an ad hoc gray market that sprouted spontaneously from the pent-up desire among the Vietnamese to cash in on the country's economic boom. "It's the Wild West," says Noritaka Akamatsu, the World Bank's lead financial economist in Hanoi.

No one knows how big this gray market is. Nguyen Duy Hung, CEO of Saigon Securities Inc., the country's largest brokerage, estimates that at least 500,000 Vietnamese are participating (five times the number of accounts on the two official bourses), aided by more than a dozen private websites and online forums with names like mua re (street trading) and The latter, founded in July in Hanoi, has 18,000 registered users and is currently adding 300 more each day, says co-founder Hoang Minh Son. "Before the websites, people had to go to the official market," says Son, 25. "But people find our process quick and easy."

A few years ago, sites like couldn't have existed because there was no stock to trade. The vast majority of Vietnam's companies belonged wholly to the state. But as part of the government's move to a free-market economy, some 3,600 state-owned companies have been partially privatized by issuing shares to employees, managers and the public—who in turn have sold them through the Internet and in private deals with family, friends and acquaintances. This is capitalism in the raw. When deals are struck, whether online or over tea, purchasers take physical possession of the shares, and buyer and seller often go to the company's headquarters to register the change of ownership. In some cases, no registration takes place; the seller only provides a bill of sale.

While legal, the business is obviously risky—and not just because of the potential for fraud and theft. Until recently, unlisted companies were under no obligation to disclose financial information, so investors had few ways to gauge company performance or whether an investment was sound. Although some websites track the prices of popular stocks, reliable market data is nonexistent, meaning it's virtually impossible to determine if prices are fair. Neophytes are informed almost solely by gossip and the misguided hope that what goes up will continue to go up. "Basically, the way stocks are researched is 'My grandfather's uncle's cousin's wife works at this company and says it's a good buy,'" says Mike Temple, a director at securities-trading company Dragon Capital in Ho Chi Minh City.

Despite the dangers, the gray market is flourishing, spurred on by Vietnam's robust growth, optimism surrounding the country's recent entry into the World Trade Organization, and the rapid rise of sanctioned stock markets. Last year, the VNIndex, which tracks the prices of all of Vietnam's publicly traded companies, jumped 144% and has risen another 44% this year. But the legitimate market is small and illiquid—the Ho Chi Minh Securities Exchange has just 109 listed companies, up from 30 at the beginning of 2006—and there are not enough shares to feed the growing mania for stocks. Nguyen Vinh, a 36-year-old accountant, says it was her inability to buy shares of listed companies that prompted her to turn to the gray market. After her sister told her that a friend had met someone in a wedding buffet line willing to sell shares in PTSC, an unlisted company that provides equipment and services to the oil industry, Vinh finagled an introduction and bought 1,000 shares for about $7,600. Three weeks later, she sold for a 30% profit to someone who answered her advertisement on Now Vinh says she's looking for new stocks to buy. "There may be a bubble, but I'm not afraid of it," she says.

Vinh may have no fear, but the government is getting nervous. Vietnam recently passed new securities rules aimed at improving corporate transparency and curbing market excesses. Among other measures, the law requires all unlisted companies with shares available for purchase to be audited, to post annual financial reports with the State Securities Commission, and to register stock transfers. But Vu Bang, the commission chairman, acknowledges that he lacks the staff to enforce the rules. The commission has only 10 inspection officers to oversee a total of 198 corporations listed on the two official bourses and thousands more that are unlisted. "In 2007, we can't expect too much," Bang says, adding that there are no immediate plans to regulate the stock-trading websites. "We are considering how legal or illegal those websites are," he says. "In time, we'll consider it more."

Trung, the engineer, is rushing to cash in while he can. He expects the unofficial market will eventually be regulated, curbing the potential for instant windfalls. To contain volatility, for example, the Ho Chi Minh Securities Exchange suspends trading in a stock when its price rises or falls by 5% in a day. Gray-market stocks can double in a single deal. "There are no rules on the OTC," says Trung, "so you can get huge profits. That's why we have to take advantage of it now." The madness of crowds, it seems, is alive and well.