The Bubble and Crash of

Vietnam’s stock market

during 2006-2008

by
Dinh Duy Chuong

Course : Financial Bubbles and Crashes

Lecturer : Nathan Nguyen

November 2009
 The Bubble and Crash
of Vietnam’s Stock Market

TABLE OF CONTENTS
List of Abbreviations............................................................................................................ iii
Exchange rate................................................................................................................... iii
List of Figures...................................................................................................................... iii
1. Introduction....................................................................................................................... 1
2. The bursting of Vietnam’s stock market ............................................................................ 2
2.1 Stealth Phase ............................................................................................................... 3
2.2 Awareness Phase ......................................................................................................... 4
2.3 Mania phase ................................................................................................................ 5
2.4. Blow off phase ........................................................................................................... 6
3. Conclusion ........................................................................................................................ 8
List of References .................................................................................................................. I
Appendix 1: Scale of Stock market in 2006-2008..................................................................II
Appendix 2: Stock market - Top 10 richest people (2006-2009) ............................................II

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List of Abbreviations

HoSTC Ho Chi Minh City Securities Trading Center

P/E Price/Earnings Ratio
SBV State Bank of Vietnam
USD United States currency
VN Index Hochiminh City Stock Exchange indicator
WTO World Trade Organization

Exchange rate

2006: USD 1 = VND 15,700

2007: USD 1 = VND 16,000
2008: USD 1 = VND 17,000

List of Figures

Figures

Figure 1: VN Index ............................................................................................................... 2

Figure 2: Stage 1 - Stealth Phase ........................................................................................... 3
Figure 3: Stage 2 - Awareness Phase ..................................................................................... 4
Figure 4: Stage 3 - Mania phase ............................................................................................ 5
Figure 5: Outstanding stocks - Price increasing ..................................................................... 6
Figure 6: Stage 4 - Blow off phase ........................................................................................ 7

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1. Introduction

Shortly after Vietnam became an official WTO member, the stock market has been one of the
first areas in developing excitingly with mutant increasing of many share prices. In 2008
Vietnam’s stock market experienced a bubble bursting which has been still an unforgettable
pain of so many investors. The report is intended to have a look back to this bubble and
analysis its causes as well as consequences based on four keys driven: monetary policy,
global economy, inflation and perception of investors.

A stock market boom can be described as a bubble if there is high probability of a large scale
fall in share prices. At the stage the price free-falls then a bubble breaking will happen as an
indispensable result. In Vietnam, though one more crash in stock is hardly to occur in the
coming time, a potential collapse might come in future as a part of an economy. Nobody
knows when this bursting will be; however, as an ambition of the study, the last bubble of
Vietnam stock market is going to be analyzed to find out major signals for the next one that
may be coming.

How to prevent or limit the harmful effects of the bubble are thorny policy issues. These
interesting will not be mentioned to in this study scope.

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2. The bursting of Vietnam’s stock market

Started in July 2000, Vietnam’s stock market made a giant jump in the period 2006-2008,
reached the peak of VN-Index at 1,171 points in March 2007. This time was also witnessed
the forming, developing and exploding of the biggest boom of the stock market. None has
suffered as roughly as Ho Chi Minh City's market, which dropped to below 300 points at the
end 2008.

Figure 1: VN Index

(Source: www.sbsc.com.vn)

The bubble & crash can be divided into 4 stages:

. Phase 1 – Stealth phase: With the increasing of speculation, the trend moves from an un-
recognized status to a recognized tendency
. Phase 2 – Awareness phase: People get notice the uptrend more clearly and a test period can
happen to interfere in the price drop.
. Phase 3 – Mania phase: Expectation is pushed strongly together with the exaggeration. It
moves to the period of dusk when people continue playing, although they no longer believe in
it.
. Phase 4 – Blow off phase: The trend of decline and people abandon hope. Everyone
recognizes and agrees that the bubble has burst, and life will never be the same.

The study will identify these stages of VN Index through the period 2006 – 2008.

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2.1 Stealth Phase

5 years after launching, the stock market in 2006 started a new stage of acceleration, more
powerful, with larger scale. This was expressed through a series of important decisions from
the Government, such as Decision 528 for approving the list of State enterprises being on the
way of listing, and doing transactions on stock market; Decision 189 for establishing an
independent securities depository or Decision 238 for raising percentage of ownership of
foreign investment - up to 49%.

Figure 2: Stage 1 - Stealth Phase

(Source: www.sbsc.com.vn)

There were a lot of market mechanisms of supporting the market development, creating
favorable conditions to encourage enterprises to participate in the stock market. Many giant
state-own enterprises fell into a racing run of going to public, created an exciting stock
market. As a result, together with an increasing of the number of listed companies, the
number of investor was rising as well. However it did not recorded the joining of organized
investors into the market. According to an estimate by the State Securities Commission, up to
90% of investors were individuals. Almost of investing organizations were established by
foreigners; nearly none of domestic security ones appeared.

In this stage, the uptrend was still formed clearly though a taking off signal was able to be
recognized. Q1 2008 recorded an increasing of VN Index to 400 points, launched a strong
development followed. And of course, the moneys placing to the market at this time was the
smart ones. The thing is “who knows”.

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2.2 Awareness Phase

Figure 3: Stage 2 - Awareness Phase

(Source: www.sbsc.com.vn)

Speculation happened. While only “insiders” took part in the market at stage 1, institutional
investors jumped into this attractive portion at the time. A full of optimistic report about
Vietnam's market from Merrill Lynch earlier 2006, by that income from Vietnam stock
market would increase at a rate of 35% per year, were inflated joy of domestic investors -
foreign investors rushing to come. With psychological movement, the market continued to be
pushed up rapidly. The VN Index climbed from 300 points at the beginning of 2006 to 600 in
April. Double increasing in four months is an amazing speed of development for any stock
market over the world.

Meanwhile, most foreign investors looked more conscious about the market, not so high as
what Merrill-Lynch had predicted before. Therefore a test period occurred during the
awareness phase, with the price dropping, to 400 points at May. However the uptrend was re-
formed after winners who sold off their stocks at the peak in April came back to the market
together their big profits to buy in for catching new opportunities. In addition the decline of
the VN-Index strengths after April was also a great chance for long-term strategy investors in
collecting potential stocks.

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2.3 Mania phase

This is a boom period. Market continued breaking new records; the psychological speculation
dominated completely domestic investors, attracted them to follow optimistic assessments
and strategic investment activities of foreign investors.

The market status was excessive excitement while still having quite loose management.
People, regardless experience investors or housewives, were rushing to buy stock. They were
only interested in buying without any concerning to what the respective enterprise business
had been doing or how the rate P/E and income were.

Figure 4: Stage 3 - Mania phase

(Source: www.sbsc.com.vn)

As a result, this speculation wave made the sublimation of the VN-Index. At end 2006, there
were 106 stocks, 02 fund certificates, 367 bonds with the total listed value according to fair
value of USD 4.6 billion in Hochiminh City Stock Exchange. Total market capitalization in
both stock exchanges was around USD 14 billion, accounted 22.7% GDP. Stock price
increases each day without any specific reason. From Nov., 2006 to Mar., 2007, the market
grew at a rate of 130%, from 500 to 1150 points. According to some experts, there was no
precedent in the world like this.

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The crazy growing of stock price became one of hottest subjects exploited fully by internal
and external medias. When the enthusiasm was delivered to everyone, the number of new
buyers entering the market was increased rapidly. Whatever a stock is, penny or blue-chip
share, good or bad one, they was looked for buying, causing a surge in trading volume. It was
created the sentiments in investments with no fear and crowded effect. Small investors were
excited to come to trading floor, eyes glued to the giant display screens as shares hit ever
more extravagant highs. Profit was easy to earn through stock market produced the greed
risen investor inside. Then an increasing effect of leverage occurred. Investors, small ones as
well as domestic companies, borrowed to buy shares from many sources: banks, relatives,
friends, savings, etc. Pressure of repayment at due day amplified the degree of the price fall.
Unfortunately, investors didn’t know that they were at the end of a bear cycle.

Figure 5: Outstanding stocks - Price increasing

700 140
600 120
Price (1000 VND)

500 100

change (%)
400 80
300 60
200 40
100 20
0 0
ACB FPT REE SAM SSI STB VNM
Outstanding Stocks

Price (Jan 02 2007) Price (Mar 05 2007) % change

(Source: www.cafef.vn)

Moreover, loosen monetary policy with low interest rate made a money supply adding to the
economy and created the huge outstanding loans in securities investments.

2.4. Blow off phase

VN Index reached its peak at 1170.67 points on 12 March 2007. The market experienced a
period of decline and “recover” in the rest of 2007. It is the moment of fear and “truth” when
exaggerated expectations were not maintained actually. People continued “playing”, although
they no longer believed in the uptrend of market. VN Index fell to 850 points at the end 2007.
Price fluctuation may signal a dominance of noise trading, forecasting a stock market
collapse.

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Figure 6: Stage 4 - Blow off phase

(Source: www.sbsc.com.vn)

In 2008, in Vietnam as elsewhere in South-East Asia, almost everything went up in price -

food, fuel, housing, but shares had been heading the other way. The Ho Chi Minh City's
market, the region's youngest, fell 62% over the year. Small investors experienced the stock
market downside, as its first ever bubble had popped.

The gloomy mood spread from investors to stockbrokers' offices. A little bit air went out of
the bubble when Government started instructing banks to stop lending to people and
companies borrowing to speculate on shares. Besides that banks were also ordered to stop
selling shares that they had received as collateral. However, one more time crowed effect
made a domino phenomenon of fear among local punters. One looked into another and they
tried pulling their money out, under the fright growing.

This stage also experienced an increasing number of corporate scandals, fraud and corruption.
Share price rise augments the power and influence of executives. Several giant state-owned
corporations which are non-financial firms were distracted from their core businesses by the
temptations of dabbling in shares. It was found that far too easy to issue shares and thus, the
constant stream of rights issues diluted earnings per share, contributing to the market's fall.

The global turmoil in the U.S. and other European countries and the collapse of securities
markets affected Vietnam’s economy and Vietnam’s stock market as well. The world fuel
price increased sharply, from USD 53.4 per barrel in January 2007 to USD 89.4 per barrel in
December 2007, and reached as USD 125.96 per barrel on 9 May 2008. Investor psychology
was affected; stocks were not the attractive investment channel.

One more key driven of the crash came from domestic inflation. A large number of money
flow from stock market to real estate market as the land price could jump to double or triple
in a short term, contributed on bursting the stock boom. In the other side, with the purpose of
reining in roaring inflation, up to 25% in the year 2008, Government had had to re-impose
lending curbs in order to reduce speculation. This added to the anguish in the stock market as
well.

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3. Conclusion

A stock market bubble and its bursting cannot be provided with any tools of mathematical
economics. It happens because of a drastic change in the behavior of market players rather
than a certain level of share overvaluation or anything related to fundamental shares.
Nevertheless there are some factors which are able to aim in recognizing a potential bubble
such as increasing activity on monetary policy, more leverage effect, crowded effect, the
overheated global economy and inflation.

After a crash, the framework surrounding the stock market may also change, bringing about
legal, regulatory and institutional evolution as a consequence of the collapse. Above all is
lesson learnt which an investor can keep in his mind as a precious experience for the
investment later. No one can get success without having failures before.

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List of References

Douglas Edward French, ‘Early Speculative Bubbles and Increase in The Supply of Money’,
May 1992

Gyorgy Komaromi, ‘Anatomy of Stock Market Bubbles’, 2006.

The Economist print edition, ‘The fall of Ho Chi Minh City’, April 2008.

Regularly visited internet source:

http://cafef.vn
An Online Financial News

http://www.sbsc.com.vn
The Sacombank Securities Company Website

http://www.thanglongsc.com.vn
The Thang Long Securities Company website

http://vneconomy.vn
The Online Vietnam Economy Website

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Appendix 1: Scale of Stock market in 2006-2008

2006 2007 2008

HASTC HOSE Total HASTC HOSE Total HASTC HOSE Total
Listed company 87 106 193 112 141 253 168 125 221
Market
capitalization
(billion USD) 4.6 9.2 13.8 7.7 21.8 29.5 3.1 21.3 12.7
Market
capitalization
(GDP %) 7.5 15 22.5 13 37 50 10 30 17
Transaction value
(billion USD) 1.2 5.6 10.1 2.9 14.4 17.3 3.2 50.2 65.3
(Source: www.cafef.vn)

Appendix 2: Stock market - Top 10 richest people (2006-2009)

No 29-Dec-06 31-Dec-07 31-Dec-08

Value Value Value
Full name Stock USD mil Full name Stock USD mil Full name Stock USD mil
Dang Doan
Truong Gia Thanh ITA, Nguyen
1 Binh FPT 131 Tam KBC 350 Duc HAG 342
Le Quang Pham Nhat Pham Nhat VIC,
2 Tien FPT 95 Vuong VIC 208 Vuong VPL 290
Dang
Bui Quang Tran Dinh Thanh KBC, SGT
3 Ngoc FPT 66 Long HPG 193 Tam ITA 182
Nguyen
Le Van Duy SSI, VSH, Tran Dinh
4 Quang MPC 64 Hung PAN-HNX 156 Long HPG 88
Chu Thi Dang Thi
5 Binh MPC 64 Doan Toi ANV 146 Hoang Yen ITA 75
Hoang
Minh Tran Kim KDC, Pham Thu VIC,
6 Chau FPT 52 Thanh NKD 120 Huong VPL 55
Nguyen Nguyen
Duy SSI, PAN, Nguyen Thi REE, Duy PAN, SSI,
7 Hung VSH 51 Mai Thanh STB 99 Hung VSH, HAG 54
Dang Thi
Do Cao Truong Gia Hoang KBC, SGT,
8 Bao FPT 50 Binh FPT 95 Phuong ITA 37
Nguyen Thi REE, Dang Ngoc Dang Ngoc
9 Mai Thanh STB 49 Lan ACB 94 Lan ACB 34
Nguyen
Tran Kim KDC, Duc Truong Gia
10 Thanh NKD 47 Kien ACB 86 Binh FPT 32

Total 669 Total 1,547 Total 1,189

(Source: www.cafef.vn)

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