On Oct. 8, Zhang Meilan, a Vietnamese real estate tycoon who worked with Li Ka-shing in high profile, was suddenly arrested after police said his company was suspected of illegally issuing bonds and raising trillions of dong.

The news caused an uproar in the industry, not only leading to a run on large Vietnamese banks, but also collapsing the Vietnamese stock market.

Since the beginning of this year, the Vietnamese government has set off a financial anti-corruption storm and stepped up efforts to rectify the real estate market. Against this background, a number of Vietnamese real estate leaders, including Zhang Meilan, have been jailed.

As Vietnam's policy and financial environment continue to tighten, which company will be the next to storm?

The richest Chinese woman in Vietnam has been arrested, and large banks have been run.

Zhang Meilan, the fourth-generation Chinese in Vietnam, originally from Shantou, Guangdong Province, is the founder of Wanshengfa Group, which covers real estate, transport infrastructure and other areas, is the largest private real estate company in Vietnam.

Since Wanshengfa Group is not yet listed, no one knows exactly how much money Zhang Meilan has, but she is widely known as the richest Chinese woman in Vietnam.

On Oct. 8, Vietnamese police announced the detention of Zhang Meilan and other related personnel, saying she was suspected of illegally issuing bonds between 2018 and 2019, raising trillions of dong.

Since then, rumors that Saigon Commercial Bank (SCB) was linked to the case spread on Vietnamese social media, triggering a run on Vietnam's fifth-largest bank.

In an effort to reassure the market and depositors, Vietnamese regulators said on Saturday that SCB would be subject to "special scrutiny", while SCB raised interest rates to reattract depositors.

Nguyen Thi Hong, governor of the Central Bank of Vietnam, immediately explained thatSCB has confirmed that Andong (a company related to Zhang Meilan's illegal bond issuance) is not a shareholder of SCB Bank, and Zhang Meilan does not hold a management position at the bank. Therefore, Zhang Meilan's arrest does not affect the normal operation of SCB Bank.

Nguyen Thi Hong said the bank had taken "necessary measures" to ensure the normal operation of Saigon Commercial Bank and the liquidity of the bank.

The bank's endorsement temporarily calmed the run, but Zhang Meilan's arrest highlighted the serious risks facing Vietnam's economy as a whole.

Real estate tycoons were arrested one after another

In fact, before Zhang Meilan, a number of real estate leaders have been arrested in Vietnam for illegal acts, and related real estate groups have been bombarded one after another, two of the most famous cases being Xinhuangming and FLC Group.

At the end of 2021, Xinhuangming Group won a land auction organized by Shoutian New District of Ho Chi Minh City with 24.5 trillion dong.

Before the auction, Xinhuangming Group issued nine bonds with a total value of 10 trillion dong. However, the buyer is Xinhuangming Group itself. Xin Huangming packaged these bonds into investable derivatives and then lured investors into buying them by promising high yields.

Less than two months after the successful auction, Xinhuangming Group quietly withdrew from the deal, causing investors who bought the product to lose all their money.

On April 4, the Vietnamese National Securities Commission cancelled the issuance of the nine bonds on the grounds that the public information was not in line with the reality and that the issuance information was hidden. On April 5, the investigation agency of the Ministry of Public Security of Vietnam charged and detained du Yingyong, chairman of Xinhuangming Group, and six related people on the grounds of "fraud and embezzlement of other people's property."

Since the new Huangming incident, the Vietnamese government has set off a financial anti-corruption storm and began to conduct a comprehensive review of bond issuers. Against this background, Zhang Meilan was arrested.

In addition, in addition to du Yingyong and Zhang Meilan, Zheng Wenchao, chairman of FLC Group, a Vietnamese real estate developer, was arrested in March on suspicion of manipulating the securities market.

House prices are out of control and the government is speeding up credit tightening.

Property prices in Vietnam are almost out of control at a time when the government is trying to clean up the property sector.

According to an earlier report by the Securities Times, house prices in Ho Chi Minh City, the largest city in Vietnam, and Hanoi, the capital, were among the top 10 in Asia in the first half of 2022, with prices in Ho Chi Minh City rising more than 20% in the first half, with an average price of more than 35000 yuan. There are also media reports that house prices in Ho Chi Minh City reached an all-time high in 10 years in April 2022.

In recent years, with the accelerated economic growth and the continuous development of the manufacturing industry in Vietnam, a large amount of hot money has poured into the real estate market, and land and house prices have continued to soar.

In order to cool the property market, the Vietnamese government began to tighten credit policy.

In May 2022, the Ho Chi Minh City Branch of the Central Bank of Vietnam asked all credit institutions in the urban area to strictly regulate the credit examination and approval of the real estate sector. in addition, a number of banks, such as the Vietnam Foreign Trade Bank, Vietnam Science and Technology and Commercial Bank, have also announced one after another to restrict the issuance of loans related to the real estate business.

In August 2022, Vietnamese Deputy Prime Minister Le Wencheng said that supervision over bond sales of real estate companies would be strengthened to avoid speculation and price manipulation.

In September 2022, Tao Mingxiu, deputy governor of the Central Bank of Vietnam, made it clear that the central bank would step up scrutiny of bank loans, especially in risk areas such as real estate projects.

The bad debt rate of banks has rebounded, the capital adequacy ratio has declined, and the financial industry has a lot of hidden dangers.

Zhang Meilan's arrest highlighted the risks of real estate in Vietnam and the fragility of the Southeast Asian country's financial sector.

According to the World Economic data (CEIC Data), Vietnam's bank capital adequacy ratio has continued to decline in recent years. By June 2022, Vietnam's bank capital adequacy ratio had fallen to 11.5% from a high of 14.3% in May 2013, of which the asset adequacy ratio of state-owned banks was only 8.9%.

The rate of bad loans in banks has also rebounded.

According to data previously provided by Tao Mingxiu, the bad debt rate of Vietnamese banks was about 1.9% in 2021, up from 1.7% in 2020. According to media reports, as of June this year, the non-performing loan ratio of Vietnamese listed banks climbed slightly to about 2.1%.

In 2012, a lending boom and poor regulation led to a surge in bad loans at Vietnamese banks, arrests of bank executives and a collapse in the stock market. At that time, the non-performing loan ratio was 17%.

The exchange rate of the Vietnamese dong continues to depreciate and the debt risk rises.

In addition, the debt burden of Viet Nam's economy, households and enterprises is rising.

As of the second quarter of this year, Vietnam's total debt was about $160 billion, equivalent to 1.5 times that of foreign exchange.

On Monday, the central bank of Vietnam announced that it would expand the trading band of the dong against the dollar to 5% from 3% previously.This shows that Vietnam is willing to tolerate a further weakening of the dong.

So far this year, aggressive interest rate hikes by the Federal Reserve have put general pressure on emerging market currencies, including the dong. Although the economy has provided some support for the exchange rate, the Vietnamese dong has fallen nearly 7% against the dollar so far this year and is now operating at an all-time low.

In order to defend the exchange rate, the central bank of Vietnam was forced to raise interest rates sharply and sell large amounts of dollars.

After the Federal Reserve raised interest rates by 75 basis points in mid-September, in order to stabilize the country's foreign exchange market, the Central Bank of Vietnam announced an emergency interest rate hike of 100 basis points on September 26, the first increase since the outbreak in September 2020.

Vietnam has been selling dollars in recent months, and its foreign reserves fell to $101.4 billion as of September, down from 109.6 billion yuan at the start of the year.