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Decree may lead to gold trading monopoly

Update: November, 07/2011 - 09:31

by Thien Ly


The public is concerned that the State Bank of Viet Nam (SBV)'s draft decree on gold bullion trading could lead to monopolistic practices since few companies would be able to meet the requirements.

Under the decree, businesses seeking gold-production licences would have to have legal capital of at least VND500 billion (US$23.8 million), and sufficient facilities and equipment for production. They would also be required to have a 25 per cent market share for three consecutive years.

The draft decree also requires institutions and individuals trading gold bars to get a licence and follow the regulations related to capital, revenues and network.

Traders must have prescribed capital of at least VND100 billion ($4,800) and two years' experience in gold trading. They must also have paid taxes of more than VND500 million ($24,000) a year for two years.

The central bank hopes the stricter requirements would help ease speculative and manipulative activities in the local bullion market by reducing the number of gold traders and manufacturers in the country, which now stands at 12,000 and eight, respectirely.

However, many independent market watchdogs and gold firms disagree with the SBV's new rules, saying that only the Sai Gon Jewelry Company Ltd (SJC) could meet the requirements.

Of all the conditions for a firm to produce gold bars mentioned in the SBV draft, the most important one is to have a 25 per cent market share for three consecutive years.

The SJC is the only company that satisfies this criterion because the company currently holds a 90 per cent market share in gold-bullion production.

Critics also said that the required chartered capital of VND500 billion was too high for most local gold traders.

They noted that the decree would be unfair to other gold producers, and the latter would accrue big losses if the decree was approved.

Gold-bullion manufacturers have invested heavily in technology to produce gold bars and spent a lot of money building their brandnames.

The new policy could also lead to more red tape and time-consuming procedures, they said.

Companies with raw material gold import quotas would be forced to send orders to the central bank and even to the SJC to get approval every time they wanted gold bars to sell.

According to gold experts, management of the gold market is necessary, but appropriate measures that meet the market's consensus must be considered.

Vu Minh Chau, director of the Bao Tin Minh Chau Jewelry Company Ltd, said only two companies could meet the new draft decree requirements to make gold bullion, while only a handful of firms would be eligible for trading gold.
Tightening gold manufacturing and trading is the right thing to do, but stringent requirements would lead to a monopoly since only a few firms could satisfy the demand, according to Chau.

Many market analysts fear that a return to a gold monopoly would damage consumer interest in gold brands sold at different prices.

One expert, who did not want to be named, said the SBV aimed to directly manage gold production and trading activities. It wants to intervene in the daily trading prices of the SJC in order to stabilise the market.

Under the plan, the SJC would produce gold bars to meet market demand after the SBV receives orders from traders. Such a model has been applied in many countries.

Market analysts, however, are concerned that there would be a shortage of gold bullion if the SJC refuses orders from the SBV (as the firm is not an SBV subsidiary), or fails to meet market demand. A disruption in supply could cause a major price hike.

They are also worried that if the current 10,000-plus gold shops are required to cease operations, they might begin operating illegally to meet demand.

Firms which are not allowed to manufacture gold bars could focus on producing gold jewelry to meet demand, and thus the domestic raw material gold source would be used to produce jewelry, not gold bullion.

This is contrary to the SBV's intention. It wants people to buy gold bars and then deposit them in banks. The banks are not allowed to receive jewelry as deposits.

Phi Dang Minh, former director of the Foreign Currency Management Department, however, said reducing the number of gold manufacturers was necessary because the draft would not only help the Government control gold quality but also curb gold speculation, and keep the economy from being driven by gold.

Banks to regulate lending

The central bank is applying seven measures to regulate the market for the rest of the year, and one of those would control outstanding loans pumped into the non-production sector.

Banks must show they have cut their outstanding loans to the non-production sector to 16 per cent by December 30.

Most banks are sprinting to implement the central bank's requirement on schedule with several measures.

Before the central banks decision on this, 24 banks had made loans to the non-manufacturing sector, particularly real estate, which accounted for 25 per cent or more of total loans.

For some of them, the figure was up to 45 per cent, according to the State Bank of Viet Nam.

Banks have been trying to negotiate with clients to recover debts, particularly those injected into the real estate industry, to ensure their outstanding loans pumped into the non-production sectors would be cut to 16 per cent by the year-end.

Banks have had to work with borrowers to get back the money from the loans since many non-production debts are not yet due.

According to market analysts, the banks'decision to stop lending to the non-production sector is a wise solution since it would help the banks reduce risks when the market falls into a prolonged recession.

However, the banks' intention to recover debts, particularly those that are not due, is not feasible.

Real estate companies are financially unstable, which is shown via their interest coverage ratio.

Interest coverage ratio is a ratio used to determine how easily a company can pay interest on outstanding debts. It is calculated by dividing a company's earnings before interest and taxes by the company's expenses.

The lower the ratio, the more the company is burdened by debt. When a company's interest rate coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.

An interest coverage ratio below 1 indicates the company is not generating sufficient revenue to satisfy interest expenses.

Meanwhile, according to a survey of the central bank of 10 real-estate trading companies, most have interest rate coverage ratios of only around 1.27.

This figure shows that the real estate companies' ability to pay back bank debts on schedule is almost impossible.

In the face of banks' enforcement, many real estate developers have had to slash prices of their apartments to boost revenue.

PetroVietnam Power Land Company is an example. Late October, the company announced a discount of 34 per cent on its 85 apartments in its project in District 2 to VND15.5 million ($738) per square metre from 23.8 million ($1,130).

They did this in order to raise funds to repay a VND100 billion loan from the Lien Viet Post Joint Stock Commercial Bank, which is due in late November.

After the PVP Land case, several real estate companies in HCM City and neighbouring provinces also decided to reduce prices of their property products by between 12 and 30 per cent to raise money to repay back bank debt.

However, in spite of having their prices cut sharply, not all properties can be sold easily because investors are afraid of high inflation and are expecting further price reductions.

For banks to get back their money, they will likely have to sell properties of borrowers that were used as collateral to secure their bank loans.

However, both measures could possibly result in seriously depressing the domestic real estate market, analysts said.

They also pointed out that the banks' rush to recover debts was one of the main reasons behind the continued fall of the VN Index and the stock market in recent trading sessions.

Private telecoms out

The number of facility-
based telecom service providers that have their largest shares held by the Government will be reduced from the current 10 to five under Decision 55/2011, issued in mid-October by Prime Minister Nguyen Tan Dung.

The Government's move is expected to create a big opportunity for investors from non-State sectors to participate in the telecom industry.

The new decision says the Government would hold 50 percent or more of the legal capital, or contribute 50 per cent or more to the legal capital, at five telecom companies.

The five companies are the Viet Nam Post and Telecommunications Corporation, the Viet Nam Military-run Telecoms Company (Viettel), the Viet Nam Maritime Communications and Electronics Company (Vishipel), Global Telecommunications Corporation (Gtel), and Indochina Telecom and Technology Corporation (Indochina Telecom).

EVNTelecom, Sai Gon Post and Telecommunications Corporation (SPT), FPT Telecom, Ha Noi Telecom, VTC and Viet Nam CMC Telecom Infrastructure Company (CMC TI) are also open to private participation.

The telecom industry aims to create more opportunities for these telecom companies to mobilise more capital sources from society for further development.

With the Government's new policy, the FPT expects to wholly own the FPT Telecom company, which would help it further exploit the latter's advantages to maximise profits, according to FPT general director Truong Dinh Anh.

At present, FPT's capital ownership at FPT Telecom is only 40 per cent.

The CMC Corporation also wants to enlarge its share of CMC TI from its current 49 per cent. At present, CMC TI is making a significant contribution to CMC Corporation's annual turnover.

Thanks to the Government's new policy, the SPT and the EVNTelecom, which are facing business difficulties, could find a new business model by selling the majority of their shares to private investors to raise funds to develop their own areas of strength. — VNS

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