Concerns over 'cheap money' on stock market

Recently, the cash flow has poured massively into the stock, gold, and real estate markets. Investors call this phenomenon cheap money, but it also raises concerns over inflation for the economy.
Concerns over 'cheap money' on stock market ảnh 1 The number of F0 investors, a phrase referring to those who have just entered the stock market, has rapidly grown. (Photo: SGGP)

The money rain on the stock exchange

The number of F0 investors, a phrase referring to those who have just entered the stock market, has rapidly grown. They have flocked to open new accounts, pumping money, causing the stock market to be booming. Nguyen Huynh, a resident in District 7, is one of such cases. Managing an international vocational school in Ho Chi Minh City, during social distancing, encouraged by his friends, in early August this year, he opened an account and started trading stocks. Huynh withdrew VND1 billion from his savings account then focused on investing in penny stocks, below par. Not only F0 investors but long-time ones have also shifted their investments into penny chips.

Previously, Phuong Doanh, a resident in Tan Binh District with more than ten years of experience in stock trading, had only invested in stocks of well-known and well-established enterprises. However, in the past waves, she switched to investing in small stocks, accounting for 70 percent of her portfolio.

The above cases partly reflect the recent picture of the stock market. The average liquidity in the first ten months of this year on the stock market has tripled compared to 2020 to nearly VND20 trillion per trading session.

Especially, the market had seen trading sessions with extremely high market liquidity, such as the trading session on November 19, which set a record with a total trading value of more than VND56 trillion. In the first three weeks of November, the money rain on the stock market made the VN-Index continuously break historical peaks, an increase of nearly 34 percent compared to the beginning of this year.

Noticeably, this cash flow has mainly poured into speculative small-cap stocks. Statistics show that the market price of many small stocks increased sharply in the trading week from November 15 to 19, even exceeding 60 percent. For instance, SD7 jumped 61.7 percent in just one week, while other stocks, including LG9, LIC, PTO, SD3, KCE, VTS, and QCC, climbed by over 40 percent.

The cheap money rain on the stock market has flowed into this group of stocks, pulling the stock market to continuously surpass the peak over the past time, while in the past, for the VN-Index to increase, the market needed large-cap stocks to lead.

Risk of an asset bubble

Recognizing the cash flow into the stock market, many securities companies confirm that many F0 investors are also “sharks” because they invest a lot of money, from several billion Vietnamese dongs to several tens of billion Vietnamese dong. Instead of being left in the bank to serve production and business activities, but due to low-interest rates, investors have switched the amount of money to securities to seek higher returns.

The interest rate on home loans is quite good, so many investors have asked for home loans and then poured money into securities. The skyrocketed source of capital on the stock market also comes from outstanding loans of securities companies. Statistics show that by the end of the third quarter of 2021, 60 leading securities companies have outstanding loans of nearly VND154 trillion, a record high on Vietnam’s stock market.

Obviously, the flow of cheap money made the stock market boom despite the pandemic. Experts analyzed that the stock market reflects investors' expectations. After the provinces and cities have returned to the new normal state, along with the information that the Ministry of Finance has been building an interest rate support package with a scale from VND20 trillion to VND40 trillion to stimulate the economy, investors become more optimistic to buy stocks heavily, with the expectation that the stock market will continue to increase strongly.

However, with an open economy and heavily influenced by global commodity prices like Vietnam, the inflation pressure in the coming time is existing. If the economic stimulus packages are released without control, it will lead to the accumulation of credit in securities and real estate, easily creating asset bubbles.

Regarding this, many people think that the interest rate support package is necessary, but the method of implementation and monitoring to ensure the right beneficiary is extremely important to prevent businesses from taking advantage of the loophole for policy profiteering.

According to Dr. Can Van Luc, a member of the National Financial and Monetary Policy Advisory Council, this interest rate support package must go into focus, concentrating on enterprises heavily affected by the Covid-19 pandemic. The State Bank of Vietnam should collaborate with commercial banks and associations to determine specific beneficiaries and outstanding loans.

To ensure publicity and transparency, Dr. Le Xuan Nghia, a member of the National Financial and Monetary Policy Advisory Council, suggested that the Ministry of Finance should be the agency that approves the entities eligible for interest compensation because this department best understands the health of the business.

* SBV Governor Nguyen Thi Hong: Supporting interest rates but preventing inflation

In 2021, the target of controlling inflation below 4 percent set by the National Assembly can be achieved. In 2022, the inflation risk is very high, so the pressure on monetary policy management will be relatively tense, while the bad debt of the credit institution system is increasing. Recently, credit institutions have reduced interest rates by their financial resources instead of money from the national budget.

Therefore, if the financial situation of credit institutions is eroded, it will affect the solvency and safety of the system. It is also one of the great lessons learned from the past when credit growth was high. When launching interest rate support packages, if not carefully calculated, it can easily lead to risks and inflation.

Therefore, the SBV will actively coordinate with ministries and sectors, such as the Ministry of Finance and the Ministry of Planning and Investment, to calculate interest rate support packages with a reasonable scale, scope, and dosage on the basis of ensuring macroeconomic stability and hedging against inflation risks in the coming time.