In 1986, the O pen D oor P o licy, 01' “D oi m o i”,2S vvas introduced in Vietnam, aller the Sixth C om m unist Party Congress. The relorm focused on a num ber o f socio-oconom ic policies. The most notable ones vvere: (1) ovvnership should be divcrsilìed to encoura°e non-state ovvnership and allovv the non-state sector to estahlish businesses. Joint ventures betvveen the State, cooperative and private sectors should also be permitted; (2) State enterprises should operate according to the so-called "socialist accounting principlcs’29; (3) íòreign investments should be
2t’ S e o D e c r e e n i / C P and D e c r e e 163/CP .
A lìe r the p assage o f D e c r e e 6 5 / H D B T0 1 1 May 28, 1986. legal personality o f specialized banks w a s r c c o g n i z e d for t h e fi rst t i m e ; tliis D e c r e e m a d e a first s t e p in s e p a r a t i n g t h e State adm inistrative íunction o f the State Bank and the trading lìinction o f sp e cia lize d banks. T h is new d iie e ú o n w a s later again adoplcd in D e c r e e 5 3 / I l D B ' í dated Marcli 2 6 , 1988, vvlìich gave the first le>>al Ibundation for the estab 1 ishment o f a Uvo-ticr bankiniĩ system ( s c e b c lo w , Section 1.2 o f this chaptcr).
l;or e x a m p le , to promote amicuUural production, lovver-interest-ralc loans vverc 0ÍÌCI1 giv en to e nlerprises operatiim in ihis arca - lovver compared wilh those g iv e n to enterprises vvorking in other areas; State enterprises cou ld í>el loans vvitli lo u e r interest rates com parcd vvith tliose applied lo c oop or ative s.
1 liis term ineans "Nevv D e a l” .
I ho so-called socialist accounting principles require Slate enterprises to operate on an
e c o n o m i c a l l y and n n an cia lly independent basis. In other \vords, stale enterprises liave husiness and llnancial autonom y.
IV c viou sly , State enterprises tliat niade a loss could íiel further (ìnancial support from the uovornm ent. Under the n c w s o c ia lisl nccouiitinu prineiples, tliey can 1 1 0 longer depend on sỉONciMimcntal llnancial supporl. Ratlier, llicv shoukl makc proíìts and have to be responsible for thcir o \\ 11 dcbts.
T o v v a r d s a W e Ị Ị r u n c t i o n i n g S e c u r i t i cs V l a r k e t in V i e t n a m : C h a p t e r ỉ
encouraged. Favorable policies and incentives should be applied to Vietnamese living abroad and to ĩoreigners, in order to attract their investm ent and business cooperation into the country; (4) prices shoulcỉ be liberalized. U nder this new price policy, the econom ic system should be svvitched from adm inistratively determined prices to m arket determ ine d prices; (5) the financial system should be fundam entally reformed: Central banking functions should be separated from those o f the specialized banks; (6) offícial exchange rates should be adjusted from time to tim e so that they w ould closely reílect genuine rates.30
Such renovation aim ed to switch the econom y into a state-oriented market econom y in order to p ro m o te econom ic growth. So far, the O pen D oor Policy has generated initially en co u rag in g outcomes. It is reported that the V ietnam ese social and political regime has been maintained vvhilst its econom y has quickly been stabilized and restored. D u rin g 1993, its m acro-econom ic indicators were stable;
inílation had been severe, then dropped as low as 8.4% and the budget deíìcit was reduced. M o re surprisiimly, V ie tn a m ’s econom y has even been able to recover from the slo\vdown that followecỉ the outbreak o f the regional financial crisis.
Statistics m ade vvithin the íìrst 6 months o f 2000 show that econom ic growth incrcased bv 6.2%, the h ighest rate during the last 3 years, industrial production grew up to 14.5%, and agricultural production reached a record o f 16.7 million tonnes.
In the lavv 1'cíbnn area, thc departurc point vvas December 29, 1987, vvhen the A cl on F oreỉgn In veslm en t in Vietnam (Luat dau tu nuoc n goai tai Vielnanr, hereinaíter. Foreign ìn vesím e n t A ct) was passed. Unđer Article 4 o l'th e current Act, foreisn investors can do business in Vietnam under three ionns: wholly- foreign-o\vned enterprises, ịoint venlLires and business cooperation contracts.
Article 2 o f the Act gives definitions oi' three other types o f contract into which íbreign investors may enter to do business in Vietnam. Such contracts include B uild-O perate-T ransíer contracts (BOT), Build-Transfer-Opcrate contracts (BTO), and Build-Transfer contracts (Ỉ3T). Thcsc contracts can be concluded between an authoritative Vietnam cse State organ and a lbreign investor.
Ít vvas the iìrst tim e another economic sector - Foreign ovvners, rather than State and Cooperative ones - has been le°allv recognized in Vietnam. Shortly after tha:, the Ị 990 C om panỵ A ct (Lual cong tỵ) and the 1990 Private Enterprise Ací
30 S é e Van kiưn D a i ho i D cm ạ lo a n Q utìc lun thu VI [D o c u n ie n ís () f lh e Sixlh N a lio m tl C o n g r e s s o f
t h i C o m n u m i s t P a r t y/ , ( 19 8 7 ) 4 2 — 5 6 .
11 S e e “ VieinanVs E c o n o m ic R enovation a n d its Main A c h i e v e m e n t s " , Áhiiii M a c r o - e c o n o m ic
I n d . c a t o r s , l ni p: VxvNvv v . m n l a . ụ o v.VII:8 0 8 0 / V V c b + s e iA c r / l . c o n o n i v . n s l , v i s i t e d M a r . 17, 2 0 0 1 . I h i s A c t \ v a s r e v i s e d l \ v i c c . in 1 9 9 0 a n d 1 9 9 2 . and t h e n vvas r e p l à c e d ỈĨ1 1 9 9 6 . T h e 1 9 9 6 F o r e iiỉ> i ỉn v ư sim e n l A c t vvas a lso am cndcd in 2 0 0 0 .
11
T o v v a r d s a W e ỉ l P u n c t i o p i n g S e c u r i t i e s M a r k e t in V i e t n a m : C h a p t e r ỉ
(Luaí doanh nghiep tu nhan) w ere passed. These legal d o cu m ents provided the newly-form ed market econom y som e more new types o f enterprises, by permitting the private economic sector to set up businesses under the form o f shareholding companies, limited liability com panies and private enterprises. 33 The 1999 E nterprise A c t (Lnat D oanh N ghìep), which rcplaces the above-m entioned two statutes, has broadened market participation even further by the recognition o f partnerships and single m em ber limited liabilily com panies. It can be said that since the O pen D oor P olicy was initiated in Vietnam, m arket participants have been enriched by the recognition o f a multi-sectoral e co no m y in which all economic sectors are equal beíb re the law. All com panies, including State enterprises, now have to com pete with each other to m ake their own markets in order to avoid bankruptcy. Production has been conducted subịect to the market's demands, excepl for a num ber o f State enterprises operating in some vital industrial areas in vvhich the governm ent's control is needcd for national security and deĩense reasons.
In thc taxation sphere, a turning point occurred in late 1990 w hen various tax laws were enacted, such as the Turnover Tax A ct (Luat thue cloanh thu), Proỹư Tax A ct (Luat thue loi tuc), Special C onsum ption Tax Act (Lucit thne tieu thu CỈCIC biet), and the Im port-export D uties A ct (Lnat thue xuat nhap khau). Since then, a single tax system has been adopted and applied lo all business entities C o rn in g from diíĩerent econom ic s e c to r s .35 This more or less created an equal business environment íbr business entilies regardless o f their ownership. Throughout the 1990s, the tax system hacỉ been progressively improved by the passage o f a number o f nevv tax lavvs and ordinances, and hy the revision and replacement o f other tax lavvs. 6
33 It is n e c e ssar y to e m p h asiz e that in V ietnam , the usage o f the term indicating “ business en titie s’ has been changcd froni tim e to time in legai texts. B eío re ỉ 9 9 0 , thc term “enterprise'’
vvas íbrmally used in both governm ental and ministerial legal d o c u m e n ts. W hcn the C o m p u n y Act vvas passed in 1990, the term “c o m p a n y ” vvas first formally used for shareholding and Iimited liability c o m p a n ie s . But recently the N ational A s s e m b ly has g o n e back to the term “enterprise”
vvhen ử a í t i n g and cnacliim the 1999 E n te r p r is e A ct. Thus, at present, all lavvs governing com panies in Vietnam use Ihis term. H o w e v e r , i f o n e scmtinix.es ihe A ct, this term is not aKvays used in an individual article, vvhen reíerring to all types o f enterprise. For exaniplc. the 1999 E nterprise A c í uses the lerms "limited liability c o m p a n y ”, 'ksh a reh old in g com pany" and 4tpartne*ship c o m p a n y ” vvhile it uses the term "private enterprise” .
34 S e e A p p e n d ix N o . 1, B e c r e e 5 0 -C P dated A ugust 28, 1996 on "The Establishment, R e o r g a iiza tio n , Dissolution and Bankruptcy o f State Enterprises" for the List o f Priority Areas w h e r e State Enterprises can be established.
35 S e e a*)ove n. 17 for the diíTerence belvveen the old tax system and the nevv one.
36 For e<aniple: the Orcìiìiaỉicc on Hiỉ*h Incomư E arnư rs' Tax [ P h a p /cnh ílìỉie (hu n h a p d o i voi nguoi Cỉ) thu ììh(íỊ) cao], a n d t h e Orc/inancc on I/oiísư (1/1(1 Luncl Tctx [PhctỊ) lưn/ì thue nha c/cií] vvere pisscd in 1994 and 1991 respeclivcly. I lic Titrnovcr Tax Act /Lucil ílìuc d o a n h th u ị and
T o w a r d s a W e J i P u n c t i o n i n g , S e c u r i t i e s M a r k e t in V i c t n a m : C h a p t e r 1
Law reform concerning íìnancial markets occurred in 1988 when D ecree 5 3 /H D B T dated M arch 26, 1988 was issued by the G overnm ent with the introduction o f a two-tier banking system. In this system, the State administrative functions have been given to the State Bank o f V ietnam , while the trading functions have been vested in specialized banks; and the specialized banks are no longer com ponents o f the State Bank o f Vietnam, rather they have become independent legal entities.
This Decree also created two other state-owned banks (apart from the Foreign Trade Bank and the Construction Bank, vvhich was later, in 1981, renam ed as the Investm ent and Construction Bank and then, in 1990, the Investm ent and D evelopm ent Bank) namely the Induslrial and Com m ercial Bank and the Bank for Agricultural D evelopm enl (now Bank for Agriculture and Rural D ev elo p m en t37). A few years later, the Bank for the P oor38 and Bank for Housing D evelopm ent in Cuu Long D elta39 were also established, pushing the num ber o f state-ovvned banks up to six.
In 1990, D ecree 53/H D D T w as replaced hy Ihe O rdỉnance on the State Bank o f Vietnam (.Phap lenh N gan hang nha nuoc Viet nam ) and the O rdinance on Banks, C redit C ooperatives a n d F inancỉal C om panles (.P h ap lenh ngan hang, hop tac xa tin dung va cong tv tai chinh). These Ordinances provided the m arket with more paríicipanls by pcrm itting private and íoreien sectors, apart from the State and cooperative ones, to carry out banking business. In 1997, these tvvo ordinances vvcre replaced by the State B ank o f Vỉelncim Act (Lua! ngon han g N ha nuoc Viet ncun) and the C redit ỉnstitution s Acl (Luat CÚC to chuc tin dung) respectively.
T h e C redit Institutions A ct even takes a further step com pared vvith thai taken hy the O rdinance un B anks, Cred.il Coopercilives and P in ancia ỉ C om panies in diversiíying the forms o f credit organization. Banking business can now be carried out by dilTerent econom ic sectors: state-owned, cooperative-ovvnecỉ, tbreign- ovvneđ sectors, and private scctor'10 under the 1'orms o f bankino, and non-banking institutions.
Proĩil Tax A c t [Lua! tlnte lo i tu c ] were replaced by the Value A d d e d Tax A c t [T h u e g ia tri g ia tan g] and C ư r p o r a te Incorne Tax A c t [T h u e thu nhcip d o a n h n g h ie p ] respectivelv.
37 See D e c is io n 2 8 0 /Q D - N H 5 díited October 15, 1996.
38 Tliis bank was formed under D e c i s io n 2 5 2 / Ĩ T g dated Augus t 3 1 , 1 9 9 5 , as a non-profit bank. !ts o p c a t i o n a l purpose is to e l i mi nat e poverty.
39 T i i s bank wa s set up under D c c is ìo n 7 69/T T g dated Sept ember 1 8, 1997.
40 S n c e p r i v a t e c r e d i t i n s t i t u t i o n s a r e n o t r e c o ớ ằ n i z e d u n d e r t h e C r e c / i ớ I n s ỉ i ớ u t i o t ỡ A c ớ, t h e p r i v a t e
seclor can only establish shareholdinii credit institulions. For furtlìer inlornialion, see Art. 12,
C r e ì i r / n s í i í ỉ i í i o n A c ỉ .
13
T o v v a r d s a VV eỉl F u n c t i o n i n ằ S e c u r i t i e s M a r k e t in V i e t n a m : C h a p t c r 1
The monetary m arket today is no longer coníìned within íìnancial transactions that occur between banks and entities that belong to state-owned or cooperative-ow ned sectors. Rather it has been opened to all market participants from different economic sectors. T he differentiation in interest rates based on the legal form o f the borrower has also been abolished since 1989.41 However, lending
fro m s ta te -o w n e d b a n k s to State e n te rp rise s s t ill a c c o u n t s for a ro u n d 80% o f all lending in Vietnam .42 It is also noteworthy that interest rates have continuously been controlled by the governm ent. In other words, credit organizations have to trade w ithin the ceiling and íloor interest rates announced from time to time by the
State B ank o f Vietnam. It is worth quoting the World B a n k ’s observation:
ỉn genercil, Vietnam's credit m arket is hig hly distorted as a result o f sub sid ized and directed credit program s, incỉuding the p rio rity given to loans to SO E s (state-o w ned enterprises:
author adcled) and to various com m odity p ro g ra m s f o r the purch a se o f rice and other crops fo r e x p o r t4ì
This íầct, together with the collapse o f the system o f the People's Credit Funcỉs in the late 1980s and early 1990s, led to a lack o f public confidence. It was reported that:
[T jlìc public keeps an estim oted 45% o f broad m oney as cash a n d over 50% o f local business transactions are conducted outside o f the banking svsíem ■ • ■ At p re se n t, there are only 10,000 individual bcink ciccounts f o r a p o p ulation o f 7 7 m illion. Vietncim conlinues to operate largely as a cash econom y.-1-1
In such a situation, public savings have not been able to be adequately mobilized. The banking system has missed a areal iìnancial resource vvhich il should use lor econom ic development. Capital needy businesses, in turn, have surely íầced obstacles in looking for banking loans.
41 See A rticle l.b, D e ã s i o n 3 9 / H D B ' ídated April 10. 1989 (prom ulgating “ P o licy on Deposii and L endine Interest Rates”).
42 Sse "Couiitry C o m m ercia h G uides - FY 1999: Vietnam", Chapter VII: ln vestm en t Cliiuate.
http://vvw\v.stat e .gov/vv\V\v■ ahout s 1 ate/bIIsỉ 11 e s s /c oIìj_ ạuidcs/ 1999/easta.sia/vicl99 ()7hlniI.
v isked Mar. 2 2, 2 0 0 1 .
S e e “ A d v a n c in g Rural D e v e lo p m e n t froni V isio n to Aviu'11 , hllr;//u \\ u orlclbank.oru.N n/r cp7 / v islX)03.hlml, visited Mai’. 10, 2 001 .
S ee “ Vielnani Trade and Proịcct Finan> "'S ’
httỊ://vv\s\s .tradeport.oi'a/ts/coiintrics/victnam/nnancinạ.htmI, visited D ec. 2 5 , 2 0 0 0 .
T o v v a r d s a W e ! Ị F u n c t i o n i n ạ S e c u r i t i e s M a r k e t in V i c t n a m : C h a p t e r I
The other com ponents o f the íìnancial market are non-organized credit m arkets (which have spontaneously been developed in rural areas). These markets have been operating outside the banking system, am ong individuals, and are oíten referred to as "underground credit markets".
Griffin and Keith's observation might be useful to sum up the situation o f the íìnancial m arket in V ietnam in the 1990s:
It is \videly known that the banking system is inefficient and in n eed o f reform • • * M o sỉ dom estic investm ent is self- jìn a n c e d or fin a n c e d through in form al credit arrangem ents;
the C a p ita l m arket is u n d e r d e v e l o p e d a n d th e c o m m e r c i a l banking system plays CI m inor role in fm a n c ia l interm ediation.45