Vietnam pays heavy price for uncontrolled gold mobilization
Vietnam pays heavy price for uncontrolled gold mobilization
For a long time, commercial banks absorbed in mobilizing gold and lending in gold, and selling the mobilized gold for money to lend for higher interest rates. The spontaneous activities have generated big consequences that will take a long time to settle.
Serial mistakes made
A senior official of the State Bank said that the gold market had been floated until the decree No. 24 came out which tightened the management over the market.
With the loosened management, credit institutions could easily mobilize gold, lend in gold and invest in gold. It happened that banks tried to mobilize gold in big quantity just to sell gold for money which they lent to borrowers at high interest rates.
When the “gold fever” attacked the market, people then rushed to buy gold, speculators also borrowed money from banks to buy gold. This has driven the cash flow into the gold market, causing the so called “goldenization” in the national economy.
In March 2010, the State Bank decided to close down the gold trading floors after he found the serious risks. In 2011, in a move to fight against the goldenization, the State Bank requested commercial banks to stop mobilizing and lending in gold.
In April 2011, the State Bank released the Circular No. 11, telling banks not to mobilize gold and lend in gold, and not to deposit gold at other credit institutions. It also decided that the conversion of gold into dong must be finished prior to June 30, 2011. Bank could only issue short term certificate to mobilize gold to pay back to depositors. However, no more certificate issuance would be allowed after May 1, 2012.
The instructions then caused a shock to banks. Many of them, which sold the mobilized gold for dong before, then hurried to buy gold to pay back to depositors. The demand for gold increased sharply, thus making the gold market “scorching hot.”
In an effort to cool the market, the State Bank released the Circular No. 32 in October 2011, allowing a group of commercial banks, including ACB, Dong A, Eximbank, Techcombank, Sacombank and the Saigon Jewelry Company (SJC), called the group G5+1, to open accounts overseas, sell 40 percent of the gold. The move was explained as aiming to stabilize the market.
To date, the deadline for gold account finalization has been extended three times by the State Bank, after commercial banks complained that they cannot fulfill the request on schedule. In the latest decision, the deadline has been extended to June 30, 2013.
Heavy price paid for loosened management
Tran Thanh Hai, General Director of the Vietnam Gold Business Company (VGB), noted that by allowing G5+1 to sell 40 percent of the gold balance, the State Bank then allowed them to make speculation.
At the time when the G5+1 was allowed to buy and sell gold to stabilize the market, the dong deposit interest rates were sky high at up to 18 percent per annum. The lending rate jumped to 25-26 percent, and the interbank interest rate sometimes reached 30 percent per annum.
Meanwhile, the deposit interest rate was 2-3 percent per annum only, which then prompted banks to mobilize gold and sell the deposited gold for dong to lend in dong for higher interest rates.
Commercial banks now hurry to seek to purchase gold when the deadline of June 30 nears. They have bought bullion gold in big quantity in the domestic market, which explains why the domestic price is always higher than the international price by several million dong per tael.
vietnamnet
