The risk of the Gray Rhino phenomenon – the risks of financial and monetary policy loopholes that are ignored. This increases the huge amount of subprime debt – the White Elephant for the entire economy.
Starting from the second half of 2020 when the covid business support packages were disbursed: The financial market developed rapidly and boomed faster than the real economy – where – the high valuations on the stock market throughout 2021 and recent months were completely unreasonable.
Stock prices are skyrocketing – while the majority of businesses are in a slump and still struggling with both inflation – rising material prices and deflation – shrinking customer demand due to limited international trade connections. Along with the logistics disruption crisis caused by China’s Zero Covid policy and the impact of the Russia-Ukraine war.
The irrational “market” price no longer reflects the true value of the invisible hand – the natural convergence of supply and demand, but increases thanks to the “compound effect” of the similar thoughts of tens of thousands of people. There they are dominated by emotions, sudden interests from the intentional information guidance of the market drivers.
This domination has been raised to the level of art through the manipulation of crowd psychology by social networking tools that have developed dramatically and are extremely sophisticated in recent years, unlike the previous stock market bubble – which occurred in 2007, 2008.
The “booms” and “busts” that cause great economic damage start with the “cyclical” supply of credit, with rapid growth and easy financing during the boom – misused corporate recovery credit packages – followed by a credit shortage during the bust.
The “Boom” period always involves irrational excitement in asset markets such as coins, forex, stocks and especially the real estate market, and causes the White Elephant debt bomb on the balance sheets of banks and Dinosaur corporations to increase beyond the threshold.
And when the government sees the risk of a debt-credit-bond bubble bursting, it will immediately intervene and expose huge subprime loans, typically those of FLC and Tan Hoang Minh recently.
When “Greed” stands for “Opportunity”
When a real estate salesperson tells you: You only need 20% of the value, the principal grace period is 12-24 months, the remaining 80% will be helped by the bank. If you have not proven your income – there will be a way, someone will immediately legalize the documents, prove that you are eligible for a loan, that is the beginning of the story.
When the market is trending up, stock APPs immediately invite you – provide Margin threshold and urge you not to miss the opportunity to x3, x5 your account without having to invest much capital is the middle part of the story.
Every time you go to the bank, or even the bank staff knows the amount of money in your account, they constantly call you enthusiastically inviting you to convert your deposit to invest in “subprime” bonds but labeled as qualified by banks and credit institutions – with higher interest rates – is the end of the story.
A story, a desire to “earn a lot of money” without having to do anything, you just need to sit and wait for money to make money”, and everyone wants to be in that story.
The debt bomb accumulates and when the debt bomb exceeds the threshold, credit tightens, which means the end of a long-term debt cycle when stocks lose 20%-30% of their value, assets are liquidated. Most of them are mortgaged real estate assets, prices fall, those who bought at high prices before will try to hold on until they can breathe, those who want to buy want to wait for prices to drop further.
Supply does not meet demand – transactions are gloomy, which means real estate freezes, ending a cycle.
The debt bomb lies in the banking system: Banks have always tended to finance whatever activities the owners see fit – often their own activities – and their arms often extend to real estate where there are real estate companies affiliated or directly part of that banking ecosystem.
The debt bomb is in the stock market: Trading volume in 2 years is equal to almost the entire previous decade, and trading volume in one day is even larger than the Singapore stock exchange.
“It seems like no one is working. Everyone is talking about stocks.”
The number of securities accounts/capita officially reached 5% in April 2022 in a condition where the economy is not developing normally – still struggling to recover after long periods of social distancing – is an abnormal thing but is reported by the media as not only very normal but also an outstanding achievement.
All shouted together emphasizing that the “growth prospect” will continue when the rate of Vietnamese people participating in stock investment is achieved 3 years earlier than the target set by the Government of 5% of the population investing in stocks by 2025.
And of course the result: the market weakens and declines, and it is the government’s job to publicize, adjust policies and prevent it from collapsing.
The reason – the accumulation of debt bombs in the bond mobilization channel has clearly shown its danger when it reached 1.2 million billion in early 2022.
Learning from the experience at the end of the previous cycle – after the 2008 global economic crisis, Vietnam had to pay the price in the period of 2012-2014 by merging some banks at 0 VND because the bad debts that could not be repaid were transferred to the debt purchasing and handling company VAMC.
After that, banks applied BASEL II, III, all of which limited medium-term and long-term loans more than the previous cycle. And to meet – fill this gap in demand by opening the corporate bond channel, however, this channel quickly revealed loopholes and was exploited by businesses for profit.
The State always uses the banking system to operate and regulate finance effectively in the economy and the ultimate goal is to stimulate the production of goods, export services and effective public investment projects. That will make borrowing enterprises accountable and subject to control under strict financial standards that were Baselized after the 2008 crisis.
For that reason, businesses actively issue bonds, and especially use interconnectivity – using the money raised from bonds to expand the stock market. These markets help them escape the government’s vision and control.
And unfortunately, the huge amount of money mobilized from the corporate bond market from 2019-2022 is nearly 1.2 quadrillion, while in the previous cycle it was only about 150-200 trillion. Of this huge amount of money mobilized from the people – increasing the M2 money supply – a not small number is subprime bonds and used for asset speculation – real estate and stocks.
We must understand that credit – loans provided by banks, issuance of bonds and securities is also the issuance of new “currency units” recorded on the common financial server system, and this is the main cause of inflation.
The estimated figure of about 8 million billion in loans – 9 million billion in total outstanding deposits in the entire banking system in 2019 compared to the figure of 10 million billion in loans and more than 11 million billion in deposits in 2022 shows a rapid increase in money supply.
Stock market rules do not impose any clear shareholder discipline on businesses, shareholder meetings are just formalities and hardly care about the existence of minority shareholders.
The “tycoons” often use the “pyramid” technique, arranging listed companies in order from top to bottom to be able to control the companies at the bottom of the pyramid with very small capital. Then, using the money raised from bonds – as a tool to steer the businesses at the bottom of the pyramid – they strip all the cash and other assets from this business, destroying minority investors F0, a typical example is FLC – FAROS.
The trick of pumping up asset prices by announcing projects granted to private companies, and pumping positive information and inflated audit reports into listed companies – not only happens in leading corporations but also in countless small companies – junk stocks – providing profit opportunities for those with insider knowledge – insider trading.
Through buying shares of companies that are about to receive assets – not yet announced to the public – when the price is low, and selling them for a profit at an “illegal” high price when the listed company has announced assets, along with inflating the price through rumors and resonance from pre-ordered media.
And when the stocks have been priced – inflated in value, along with subprime corporate bonds, they are mortgaged to banks – exchanging paper money for real money according to the law. And that real money is used to speculate and inflate real estate prices, continuing the above cycle of Real Estate & Securities & Bonds increasing “virtual value” – causing the financial system to quickly accumulate many risks of bad debt – White Elephants, directly threatening macroeconomic stability – the risk of chain defaults.
And that was when the government was forced to step in, even though the company had previously been deeply integrated into local economies, promoting itself as “too big to fail.” But it did collapse.
Here we see the State is taking drastic measures to prevent one thing: Stop the rise of inflation.
Corporations, with their greed, use money mobilized from the people for speculation, getting rich by “catching bandits with their bare hands” – then the risk of bankruptcy appears, the debt is supported by the state by pumping in more money – through credit extension, debt rollover, increasing money supply in the open capital market, etc. – which increases inflation.
And inflation is the amount of money that the bottom working class has been “stolen” by the greed of leading speculative corporations. The super profits of stocks have turned into personal assets during the bull run, bull trap, and the empty businesses when the downtrend ends a cycle, the banks and shareholders will bear it, but of course the banks will not bear it and will transfer this “loss” to the people through inflation.
Experience from countries that cannot escape the middle-income trap and cannot withstand each financial crisis shows this.
Economic disaster will occur – a country’s development capacity is challenged when the country’s “highly successful” entrepreneurs are just asset traders, not technology developers, or just disguise technology development to get policy incentives.
There, when the proportion of the real estate economy accounts for the majority, but housing prices exceed the majority, and the entrepreneurial spirit of entrepreneurs in general with purposes that mostly do not bring national benefits – improving competitiveness and national technological position in the international market.
To clean up the junk stocks, subprime bonds, and bad debts that have arisen in this cycle, the Government is intervening, reusing intervention measures – which should have ended after the peak of 1200 points in April 2018, but due to covid and the monetary easing that took place in response to the covid crisis – has extended this peak by 3 years.
That is, after reaching 1,500 points – the peak of the stock bubble – and will reach the lowest bottom in 2022 or 2023 depending on the response of the state to adjust monetary policy and disburse public investment in these 2 years.
Thus, the phenomenon of the Illusion of prosperity at the end of this cycle has a major cause in the expectation of real estate driving force. And the danger of an economy based on real estate is gradually forming and spreading more and more.
The driving force for the recent increase in real estate prices is as follows:
1. First: That is the Tiger Transformation expectation – the FDI shift due to Trump’s media impact in the trade war with China from 2019-2020.
2. Second: When the US prints money to “support” the Covid crisis – exporting inflation around the world, Vietnam also has to increase the money supply, which leads to the media effect of real estate corporations and real estate drivers buying news articles “Real estate is a shelter from inflation”, even claiming that “Real estate is a way to absorb inflation”.
3. Third: The government simultaneously disbursed and announced a public investment package of 3 million billion VND until 2025 – pouring money into infrastructure for the North-South expressway – inter-regional – inter-provincial expressway in 2021-2022. It has really opened up many new development spaces, helping many land areas – real estate from a remote location – ie potential products, to become real estate in prime locations, with people passing by – ie valuable products, prices increased by many times.
4. Fourth: Tightening supply: prosecuting land allocation projects – most of them in the past 10 years – without auction, canceling land-for-infrastructure projects, stopping granting new licenses for projects in most major city centers, etc. This has caused the driving forces to create real estate investment movements in the center to no longer have room to develop due to tightening supply, spreading to localities, both in rural areas, and even remote areas that have no potential to attract mechanical migration.
And as always: when corporations are torn apart, M&A, change of ownership, banks appear on the special watch list, forced to restructure, it is the time to signal difficult years for the real estate market. Real estate workers will have to return to the ultimate goal of the real estate industry, which is to help people have a home and help businesses easily have factory materials for production.
Author: Dong DC
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