HCM City’s financial hub ambitions will hinge on these reform challenges

02-Nov-2019 Intellasia | HanoiTimes | 6:02 AM Print This Post

In order to make HCM City, Vietnam`s largest economic metropolis, a financial hub in the country and region, reforms will be needed.

The theme of the 2019 HCM City Economic Forum held in October was “developing HCM City into a global financial centre.” HCM City joins a growing list of cities from Colombo to Kuala Lumpur that have announced intentions to become international intermediators of capital.

For many of these aspiring financial hubs, Dubai is the model. In the 2000s, Dubai emerged as a global financial centre. The impact has been considerable. At the turn of the millennium, the United Arab Emirates had a GDP of $104 billion. By 2018, its economy had not only quadrupled in size but had become less dependent on oil with financial services being a major driver of the growth.

Dubai, moreover, achieved this position largely through strength of will. It wasn’t one of the pillars of the world economy like New York or London. It did not benefit from a colonial legacy that bequeathed English law and language skills. Historical happenstancelike Chicago’s dominance of US midwestern agriculture which led to commodity trading or Switzerland’s political neutrality which led to private wealth managementwas secondary.

Dubai’s success story, however, is hard to repeat. First, it had some geographic advantages, such as being the hub of a global airline and having neighbours with oil savings ready for investment.

Second, it did not have any obvious regional peers for financial services and was able to fill a vacuum that scarcely still exists given the subsequent proliferation of aspiring financial centers.

Third, its political will was exceptional and extended to amending the Emirati Constitution in 2004 to provide the legal framework that a global financial centre would require.

Finally, it was willing to spend. The United Arab Emirates invested in regulatory changes, expatriate salaries, physical infrastructure, and tax incentives. Many countries have more basic needs to fund before considering such largesse.

The better approach for most countries, including Vietnam, is to first focus on becoming a national financial centre. Vietnam has huge investment needs. For infrastructure alone, the annual investment demand is estimated at $18 billion to $20 billion. If HCM City can become an increasingly effective intermediatorraising capital efficiently not only from domestic but international sourcesit will not only drive the development of Vietnam’s real economy but also develop the skills and experience necessary to move from a national financial centre to an international one.

A national and later global financial centre will require investments in physical infrastructure as well as education and training, but policy reforms are the sine qua non. Indeed, global financial centers across the world share some common characteristics:

1. Comprehensive legal frameworks. International investors need clear laws that are predictably enforced. Vietnam currently has several important laws that need to be strengthened or introduced including the Law on Securities, the Law on Credit Institutions, and a law on public-private partnerships to attract more investment into domestic securities, banking, and infrastructure.

2. Solid market infrastructure. Investors are drawn to markets where they can complete trades efficiently and cost-effectively. Vietnam is lagging in several key areas. Real time gross settlement and delivery-versus-payment are under development. The netting regime does not meet international standards and forces foreign banks to hold extra capital against exposures in Vietnam. Also, Vietnam does not have a market-determined, short-term benchmark interest rate, which is a cornerstone for so many other components of a modern capital market.

3. Monetary policy independence. Investors want predictability. The implication is that monetary policy decisions must be made with a certain degree of independence. This includes foreign exchange rate flexibility, interbank interest rate stability, and inflation targeting.

4. Robust regimes for anti-money laundering and combating the financing of terrorism. Vietnam has committed itself to implementing the Financial Action Task Force’s recommendations on anti-money laundering and combating the financing of terrorism. These are critical to ensure that foreign banks and investors can transact safely in the domestic market.

Vietnam’s growth trajectory only amplifies HCM City’s opportunity. By 2050, Vietnam is projected to be among the 20 largest economies in the world. If HCM City in coordination with the central government can carry out these key financial reforms, it has the potential to follow the model of Tokyo, Shanghai, Mumbai, and others which came to global financial prominence by first funding the development of their own domestic economies.

* Donald Lambert, ADB Principal Private Sector Development Specialis



Category: Economy, Vietnam

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