Vietnamlawmagazine

Tran Si Vy[1]

In recent times, Vietnamese gold market has caught public attention especially when the domestic gold price has “skyrocketed” going beyond any forecast, analysis and explanation of the business circle. In order to manage the gold market which is by its very nature unstable and premature, the Ministry of Finance issued Circular 184/2010/TT-BTC dated November 15, 2010 (Circular 184) and subsequently Circular 111/2011/TT-BTC dated August 2, 2011 (Circular 111) stipulating that gold with purity of 99.99% onward and jewelries with a gold purity of 80% onward are subject to 10% of export duty. In an attempt to stabilize the market, the State Bank of Vietnam (SBV) has granted quotas to certain gold dealers to import about 15 tons of gold for the first nine months of 2011.[2] Those regulations, among other things, have somewhat helped cool down the gold fever for some time. In the long run, however, it needs more than that to effectively and tightly govern the gold market. While current gold export-import policies have shown weaknesses and passivity in terms of gold price control, and gold “speculators” and “manipulators” are starting bossing the show, Vietnamese gold market, without effective legal tools, would be nothing but a mess.

Unexpected impacts of current gold import-export regulations

Circular 184 and Circular 111 currently impose an export duty of 10% on gold with purity of 99.99% onward and jewelries with a gold purity of 80% onward while providing for import duty of gold at the rate of 0%. It is widely held that they have been issued to restrict gold export and further tighten the management for stabilization of the market. Some skeptics, however, believe those regulations would provide unexpected impacts on gold trading.

First of all, anyone can see that the current export duty rate is too high (10%) that it makes it almost impossible to apply in practice. Consequently, the tax collection purpose would be unsuccessful. Take an example for illustration. Some time this year when the gold price in the local market was 2 million VND/tael lower than that of the global market, gold dealers might find it good opportunity to export gold. If the domestic gold price was, for instance, 40 million VND/tael, and if exported, gold dealers should have paid 4 million VND/tael for export duty only. Obviously, in this case, export duty is greater than the difference of gold prices (4 million VND of tax vs. 2 million VND of price difference). If exported, gold dealers would definitely get minus profits for their business. This scenario is illusory and totally unacceptable; noticing the fact that the gold price on the Vietnamese market has always been higher than the global gold price in the last three months.

Given the above perspective, it is believed that gold dealers have been trying hard themselves to “worm their way” through high tax by lowering purity of gold for export or just making it rudimentary (below 99.99% for gold and below 80% for gold jewelries) in order to enjoy the export duty rate of 0%. To have detailed figures of how much gold has been exported in the form of “rudimentary jewelries”, we may need to see reports of the General Department of Customs. However, it most likely happened that gold dealers have decreased purity of their gold to avoid 10% of duty when exporting.

In addition to failure to collect export duty for state budget since gold dealers easily neutralized tax consequences by decreasing purity of their gold, restrictions on export also have resulted in series of serious consequences. First, enterprises must incur more expenses to lower their gold purity for the purpose of avoiding export duty. Consequently, the quality of gold exported should be in question. Second, real jewelries of Vietnam, once exported, may lessen its competitiveness because of facing a high export duty. Third and more seriously, restrictions on gold export give rise to smugglers to illegally export through cross-border transactions. If this happens, the authorities may find it challenging to supervise gold smuggling through certain illegal export channels and even if they would successfully control gold smuggling, relevant management fees would be increased significantly.

Contrary to export policies, the current duty for imported gold is set at 0%. However, it does not seem easy for gold dealers to facilitate their import activities. According to current regulations, the SBV presently imposes quotas on gold import and only considers granting quotas on a case-by-case basis or before certain movement of the market. With such passive policy, it is no doubt if the gold market shows no sign of stability. Once quota for gold import is limited and granted in a discrete manner, it is understandable that the domestic gold price has been some time higher than that on the global market. This also by chance creates a motive for those who smuggle gold through illegal import and further results in another consequence on the foreign exchange rate since smugglers need to collect USD for their import.

Prohibition of gold mobilization makes gold holders risky

Along with regulations on export and import of gold, the SBV, on April 29, 2011, issued Circular 11/2011/TT-NHNN (Circular 11) banning mobilization and lending of gold by credit institutions. The issuance of Circular 11 was actually planned in late 2010 and for the purpose of implementing Government Resolution 11/NQ-CP.

Indeed, Circular 11 did not exert strong impacts on the gold market or bring any disorder to credit institutions. In late 2010 and early 2011, extension of loans in gold of credit institutions was limited to loans for production or business of gold jewelries. As a result, the scope for extension of these loans was narrowed down, making the gold deposit interest rather low. According to SBV statistics, gold mobilization was primarily concentrated in two big cities, Hanoi and Ho Chi Minh, which account for 11.7% and 76% respectively of the national total. ^[3] There was little gold mobilized in other 31 provinces and cities while the rest did not offer gold mobilization.[4] In general, regulations on prohibition of gold mobilization did not impact the majority of ordinary people, especially those living in outskirts and rural areas.

As a consequence of restrictions on gold export and prohibition on gold mobilization, a dilemma has been occurred as gold holders find nowhere to put their gold except for retention in their own safes. This creates a big risk for gold holders as no one can ensure that gold will always keep its high value without a fall. Additionally, those regulations also make a larger amount of gold unused and stuck in strongboxes of holders. Recalling that many small- and medium-sized enterprises must borrow capital at an unreasonably high rate or even have no way to approach loans, “dead gold” in strongboxes makes no sense in the development of social economy.

“Speculation” and “manipulation” stir the gold market

Undeniably, the domestic gold price has been swayed and manipulated by certain speculators during recent gold fevers. Who are they? And how to deal with their fraudulent acts? The questions have been given without answers.

It is important to note that Vietnam is not a gold producer since total mineral gold produced annually and nationwide is just two tons. Despite Vietnam largely imports gold for the market and export for trading afterwards, the domestic gold price surprisingly does not depend on the global gold price. Logically, the gold price in the domestic market inevitably must conform to that of the global market since the domestic gold market depends on the global market for supply. However, it has proved to the contrary as the gold price of Vietnam has always been higher than that of the global market in recent times. This naturally raises a doubtful question if the domestic market has been somehow controlled by “speculators” through certain manipulating acts. The answer is yes and even once confirmed by the Governor of the SBV.[5]

Not only do speculation and manipulation stir the market but they also exert adverse impacts on the rights and interests of ordinary Vietnamese who by their nature do not have sufficient information on fluctuation and movement of gold prices but primarily rely on “mob psychology” to make their investment. Even though “speculation” and “manipulation” have been officially acknowledged, it is however not easy to “unmask and call the names” of those who commit such fraudulent acts for a sanction.

Any vibrant market needs a comprehensive legal framework

While securities and real estate markets have been frozen because of credit tightening policies, the gold market, all of a sudden, has been considered a “rising star”. Once prices have been escalating, inflation goes up month by month, people have no choice but pin their hopes on gold.

While there have been legal frameworks governing securities and real estate markets, surprisingly lawmakers leave the gold market open without tight control and close regulations for supervision. Government Decree 174/1999/ND-CP on management of gold business is simply too old and out of date. Faced with new situations and frequent changes in the gold market, such decree does not work well anymore. In order for the gold market of Vietnam to get on the right track and run smoothly in transparent and wealthy manners, the SBV and other state agencies should promptly finalize the draft decree on management of gold business to submit to the Government for approval. In the meantime, certain regulations on organization and operation of gold dealers, removal of quotas for gold import or sanctions on gold price speculation and other manipulating acts in the market should be issued to provide legal grounds for operations of the gold market of Vietnam.-