Vietnam's stock index has skyrocketed over the past year, and experts are worried that a sharp fall may be on the way. The government is considering putting controls on money flowing into and out of Vietnam in an attempt to cool the market. International financial experts have traditionally opposed capital controls, but as Matt Steinglass reports from Hanoi, that may be changing.
By early March, the floors of stock trading companies like this one in Hanoi were jammed with day traders. Vietnam's stock index had nearly quadrupled in value since the beginning of 2006, and Vietnamese were racing to buy shares, even if they were not always sure what they were buying.
Loan, an accountant, says she tries to read about stocks on the Internet, but sometimes she buys them on intuition.
Much of the trading is in so-called "over-the-counter" shares, which are not regulated and are often sold by unregistered traders. This Vietnamese over-the-counter investor says there are no papers or legal guarantees that you actually own the shares you buy.
She says transactions are made based on mutual trust. Once you do not have trust, nothing is reliable.
Analysts at international investment funds say they, too, find it impossible to tell how much Vietnamese companies are actually worth, because accounting practices are too lax.
Nevertheless, portfolio investors have been pouring money into Vietnamese securities. In 2006, foreign ownership rose from six percent to 17 percent of the market; by the start of March, it was up to 19 percent.
In February, the International Monetary Fund warned that the ratio of share price to share earnings of the average Vietnamese stock had risen to 70-to-1, more than double that of other fast-growing Asian economies, such as China and India.
Financial experts fear if this stock bubble bursts, it could trigger a sharp outflow of foreign capital, as happened in several Asian countries during the Asian financial crisis of the late 1990s.
An official of a Vietnamese government financial institution, who asked not to be named, says the effects of a Vietnamese crash could be severe.
She says a massive reversal of capital inflows would affect Vietnam's foreign currency reserves, its exchange rate, the financial system and the economy at large.
To prevent this, the Vietnamese government has been hinting that it may impose some form of capital controls - measures to prevent or slow the flow of money into and out of the country.
In the 1990s, international financial institutions such as the International Monetary Fund frowned on capital controls. They advocated capital market liberalization: making it easier for investment to flow in and out. But after the Asian financial crisis, they began to reconsider.
Joseph Stiglitz is a Nobel Prize-winning economist who was the World Bank's chief economist during that crisis. He has come to believe that capital controls could be a good thing - especially in small, developing markets, and he says the IMF has been slowly moving in that direction.
"In 2003, their chief economist did a report where he came to the conclusion that the empirical evidence did not show that capital market liberalization worked. It did not lead to more growth, it did not lead to more stability - in fact, it may lead to less stability and less growth," he said.
But other economists say the record is mixed. Countries that did not impose capital controls during the crisis, such as Thailand, suffered longer and harder recessions than countries that did, like Malaysia. But since the recession ended, Thailand has grown faster than Malaysia, which has retained its controls.
Still, many developing countries have elected to keep some type of capital controls in place. Stiglitz says the most popular measures are so-called soft controls, such as higher taxes on short-term investments.
"The effect of that is that it discourages people from putting money in and out quickly, overnight. It doesn't ban it, but it does affect their incentives," he explained.
It is not certain what type of controls Vietnam might choose.
In February, the government dropped the idea of requiring investments to be held for at least a year. Proposals for harsh licensing restrictions on foreign investment firms seem to have been scrapped in mid-March after coming under severe criticism.
But the Finance Ministry is studying raising taxes on short-term investments. At the opening of the National Assembly this March, Deputy Prime Minister Nguyen Sinh Hung raised the issue in veiled terms.
Hung says there is a pressing need for "market management and monitoring measures" and a "tax policy on income generated from stocks."
Such talk may be cooling the market down. The VNINDEX began to lose ground in early March. One speaker at a recent investment forum in Hanoi said he expects the Vietnamese stock market to drop by about 30 percent in the foreseeable future.
