• 17 Jun 2022
• 2022

Real Estate Bonds – One Chinese Case Study and Policy Implications for Vietnam – Part 2: Implications for Policy Making in Viet Nam

Circular 16, issued by the State Bank of Vietnam at the end of 2021, stipulating that credit institutions and foreign bank branches buy/sell corporate bonds has had a significant impact on bankers. customers and business owners, especially real estate businesses. Circular 16 is also referred to as “three red lines”, implicitly compared with the recent policies that China's financial and banking supervision authorities have put in place to control the huge debt of tycoons in terms of the real estate sector in this country. In that context, the author has studied the characteristics and institutions of the Chinese real estate bond market to propose policy implications for the direction, supervision and development of Vietnamese real estate bond market safely and sustainably. Part 2 of the article will present policy implications for Vietnam.  

Real estate bond development progress in Vietnam

Looking back at the process of forming and developing the corporate bond/real estate bond market in Vietnam since the ‘doi moi’ policy, many similarities compared to those at China can be identified. If in the early period, the transition period of the ‘doi moi’ policy, the traditional relationships between state-owned enterprises and state-owned commercial banks (the Big 4 group) used to be acknowledged; later on, more information related to monetary relations between private equity banks and “backyard” companies through cross-ownership, cross-lending and especially ‘Connected lending’ is quite popular in China.

In addition to state-owned enterprises in general, does Vietnam have models like LGFV? So far, there has been no official research published on this topic. However, from understanding the Chinese LGFV model, looking back at Vietnam reminds us of quite familiar names listed as: Tan Thuan (IPC), Tin Nghia Corp., Becamex IDC and more.

The context of the real estate bond market in 2021

* Release Status

Table 1 gives us an overview of Vietnamese corporate bond issuance in general during the period 2017-2021. (Source: HNX, VCBS)

According to statistics of the Ministry of Finance, within the first 11 months of 2021, businesses have issued more than 495 trillion dong of bonds, of which the volume of bonds issued by private placement accounts for 94.5%. Credit institutions and real estate businesses are the largest issuers in the market, accounting for 33% and 40% respectively (Table 2. Source HNX, VCBS).

Among corporate bonds issued privately, secured bonds accounted for 50.9%; those without collateral accounted for 49.1%.

*Risk Indicators

Capital mobilization from bonds of listed companies accounts for only 4% of total assets while this figure, for unlisted enterprises, is up to 38%. This shows the intensity of unlisted firms in bonds. In 2020, unlisted real estate businesses account for 80% of the real estate bond issuance market share, the remaining 20% ​​belongs to listed real estate businesses. (Table 3. Source: Fiin, HNX)

According to the credit rating agency Fitch, for the real estate group in general, out of more than 100 businesses that issued individual bonds from the beginning of the year to November 30, 2021, 26 businesses recorded losses.

The risk indicators are even clearer when the EBITDA coefficients and bond outstanding/total debt (Table 4) are analyzed. Compared with the that of the listed enterprises, EBITDA of unlisted enterprises increased very quickly, from 5.40% in 2019 to 8.10% in 2020. Particularly, bond outstanding on total debt of Listed real estate companies also follow the same trend, up to 46% in the first 9 months of 2021. The intensity of bond lending by both listed and unlisted real estate companies is generally rather high.

Table 4 –Risk analysis indicators of enterprises. (Source: Fiin Rating)

Looking back at the process of formation and development of the real estate bond market in Vietnam since 2007-2008, some ‘interesting’ issues raised have ben identified as follows:

• Quite a few issuances fall in the most difficult periods of the economy, at least in 2007-2008 and 2020-2021 years;
• Not officially recorded any insolvency bonds;
• No bank has ever gone bankrupt;
• A large volume of bonds, including real estate bonds, are held by commercial banks. There is no detailed information in the total number of ‘trading securities’ categories in the balance sheets of Vietnamese banks as of the date of issuance of Circular 16. What is the percentage of bonds held by commercial banks?; nevertheless, that number is certainly not limited. In addition to the traditional credits granted to real estate businesses, there are purchases of bonds issued by those businesses themselves. On that basis, it is possible to imagine the kinship-type relationships mentioned above. In addition, in addition to real estate corporate bonds, most bonds issued by banks are repurchased by banks.

Policy implications for Vietnam

An overview of Chinese corporate bonds and real estate bonds, visualizing the similarities and differences between the two real estate bond markets in China and Vietnam, is the basis for policy implications so as to develop Vietnamese real estate bond market in a safe and sustainable direction. More details are as follows:

While the role of local government through Chinese LGFVs plays a dominant role in Chinese real estate bond market, whether Vietnam has enterprises bearing the ‘LGFV’ color remains to be seen is an open research issue. However, the formula ‘local government + business’ has similar colors. In fact, the decentralization of authority to local governments for planning and assigning land to real estate businesses without bidding in recent years has more or less distorted the competitiveness of the market. Vietnamese real estate market, therefore, the real estate bond market. Other consequences should be mentionedx.

Besides, the study of Chinese experience shows that the application of the minimum rating threshold for bond investment, along with the competition among domestic credit rating agencies through the application of non-uniform rating standards, can distort and reduce the competitiveness and transparency of the bond market.

Despite the fact that China has announced many insolvency bond cases, in Vietnam, since 2008 with the first bond issuance deals listed as Vincom, Sacomreal and so on, the market has not officially recorded a single bond default issue. Does this have anything to do with non-bankrupt? With banks holding a lot of corporate bonds, real estate bonds? If so, which could come first? The fact that real estate businesses own banks so that bank capital will be circulated into complex subsidiary-subsidiary systems seems to happen every day even though we have regulations on gender loan term. How to control the issue of shadow banking ‘in the Vietnamese style’, through the supervisory information system of the relevant agencies, is a ‘thorny’ issue that the world research has been around for a long time.

The article is about bonds, on the other hand, implication, finally, goes back to the banking sector because we think that: only if commercial bankers, including business owners, consider banking a profession in the right way. Its meaning, that is, do not turn the bank - where we invest, participate in shareholder capital, and become a place to lend ourselves in different forms, afterwards, we will hope for a bright and prosperous future with sustainability of the Vietnamese banking system.

Author: Assoc. Prof. Dr. Trương Quang Thông, UEH School of Business.

This article is in series of Spreading researches and knowledge from UEH with “Research Contribution For All – Nghiên Cứu Vì Cộng Đồng” message, UEH would like to invite dear readers to look forward to Newsletter ECONOMY NO. # 45 “Legal challenges and solutions towards product protection by AI”.

News, photos: Author group, UEH Department of Marketing – Communication