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New mentality for a financial center
By Huy Nam(*)
Sunday,  Feb 9, 2020,15:35 (GMT+7)

New mentality for a financial center

By Huy Nam(*)

A due recognition and in-depth research on orientation, plus good preparations with carefully-planned steps, would soon give rise to a financial center in Vietnam. Then, “Pearl of the Far East,” as Saigon was once dubbed, should be optimized, and “Saigon Financial Center” should be broadly marketed – PHOTO: THANH HOA

Twenty years ago, when Vietnam’s stock market was taking shape, the establishment of a financial center was also advocated. This issue has been discussed again recently. It comes as no surprise because that center may serve as an indispensable transition based on which Vietnam’s economy can accelerate. The problem relates, however, to when and what will help such an institution materialize and be appealing to international investors.

First of all, HCMC is arguably a de facto financial center, at least a national financial center whether this title is given to it or not. HCMC alone contributes almost 28% of the national budget where big domestic and foreign economic and financial institutions gather to become the vital lifeline of the national economy, providing it with the country’s largest and most selective human resources. However, as far as convention and scope are concerned, the city has not been recognized as a real financial center as the international financial circle sees it given their understanding, recognition and acknowledgement. HCMC remains “frontier” just the way Vietnam’s stock market is.

A real financial center encompasses different essential constituents. It must first be a vibrant location that holds irresistible attraction and fosters a selective community in which major international financial-economic institutions co-exist and closely interact with each other in line with the cluster theory. In such a community, finance—or more precisely, the capital market—plays the leading role. As a result, an effective banking system and a mature stock market are at the forefront. A look at the world’s financial centers would show that these elements are indispensable to them throughout their history of development. They are the resources capable of stimulating, attracting and incubating a wide range of financial-economic activities. The most prominent of them involves production and trading activities.

Aside from production and trading, the diverse symbiotic relationships essential for a real financial center are continuously cultivated to have symbiotic attraction. It comes from investment funds, fund management operations, insurance, risk management, asset management, consultancy/auditing, credit rating, debt settlement, mergers and acquisitions, and, perhaps more complicated forms, such as Special Purpose Vehicle (SPV). The demand for synchrony would lead to the monetary market, the foreign exchange market, the commodity market and the derivatives market, etc. Such a background signifies an image of a hub as a center in itself and explains why entrepreneurs and investors frequent and choose it as a place for their residence and business. The ripple effect of such a center also paves the way for other tangible economic sectors to work and benefit, particularly construction, real estate, commerce, services and tourism.

When it comes to purpose, the initial goal of a financial center is to help a nation or territory prosper. In line with this basic definition, a financial center should have a good location and concrete political responsibilities suiting the geographical position. However, despite minor differences in purpose, in the course of time and the making of interdependent politico-economic institutions, the restricted concept of “administrative space” can no longer be able to denote all the actual activities of a modern financial center. It is because the scope of operation, resource utilization, business opportunities and property ownership, to name but a few, no longer conform to only national border.

A nation’s prosperity has for long gone beyond national border. The demand for further expansion of financial centers has thus designated their definition in accordance with their scale, either domestic, regional or global financial centers. There is also a special category, offshore financial centers (OFCs). Born out of the global trend, OFCs are taken advantage of by regional financial centers that make use of complex financial techniques to maximize local incentives and tax havens, such as Bermuda, British Virgin Islands, or Malta. As regards scale, according to the International Monetary Fund, a real financial center would operate beyond its national boundary and are classified into three groups, from top to bottom: international, regional and offshore.

In the case of Vietnam, as mentioned earlier, as viewed by international financial circle, a financial center always needs openness in line with its operations and name. That means a financial center, which is a real and effective one, should not be formed in conformity with “local estimation mindset.” In other words, such a center should be spared from fulfilling stiff and subjective “political responsibilities.” A financial center should not be built in the same way an urban center or economic zone takes shape in line with preset “plans” or “work progress.” The building process of that financial institution should be conceived as beekeeping or edible bird’s nest production because those who come to a financial center are acutely sensitive to soft factors at the host location or nation. As a result, low attraction would also mean a low possibility of success.

That also means a successful financial center must first create opportunities for its guests’ success. To put if differently, that center should first prioritize guests’ benefits to gain its own later. The formation of a financial center as such is an issue of national interest. Therefore, preparations should be on a national scale and be done as soon as possible.

What are the preparations actually? First, the whole banking system must be safe and healthy. To do so, it is necessary to overcome the “reshuffling phase” to put an end to efforts to grow at all costs. The stock market should at least be able to depart its frontier market status by adopting appropriate legal corridor and practices. It is necessary to take that market to the next level, quantitatively and qualitatively, by, among others, stepping up flotation, getting rid of gray areas and slashing the number of enterprises with State stakes, to encourage transactions and improve liquidity.

Furthermore, the domestic financial-stock market sector is still lacking additional products and “tool-like” conveniences. Despite the existence of the derivatives market, its products are monotonous and fail to be really derivatives which should greatly support the increase of underlying asset trading. What’s more, Vietnam’s monetary market is not big enough to become a springboard for interest rates to play its role properly, enhancing the fascination of bond transactions and boosting debt trading activities. A precarious interest rate would destabilize investment flows.

A weak domestic currency which has yet to play the lead role of a host country is another restriction. This big problem can be tackled only when the dong is given an effective trading mechanism that helps the domestic currency improve and create an output for it. What’s more, a restriction of transactions using the capital account would render a financial center’s operation less attractive. It is noteworthy to know that although highly appreciated by the Global Financial Centers Index (GFCI), the Shanghai financial center has not been warmly embraced by international investors due to its restriction on capital outflows. China did not take off financially from Shanghai, but from Hong Kong. In Vietnam, Saigon once gained its “prestige,” and the author believes that if properly handled, this gateway would help Vietnam take off.

In sum, a due recognition and in-depth research on orientation, plus good preparations with carefully-planned steps, would soon give rise to a financial center in Vietnam. Then, “Pearl of the Far East,” as Saigon was once dubbed, should be optimized, and “Saigon Financial Center” should be broadly marketed.

(*) Financial, stock and economic expert; member of the council of Vietnam’s stock market index; PACE lecturer; arbitrator, Vietnam International Arbitration Center

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