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Economics: Recent rise in inflation an

upward blip in a downward trendEquity strategy: Equities look expensive

at 25x this years earnings, but

upcoming IPOs could attract interest

FI strategy: Liquidity remains flush

despite SBVs tightening measures

FX strategy: Recent acceleration in VND

depreciation represents intra-band

repositioning; entry into long VND

positions more favourable now

Despite recent upticks in headline inflation, we think

inflation remains on a downtrend. The SBVs policy

tightening measures are mainly corrective as the call money

rate has increased by only a modest 20bp. We expect range-

trading in Vietnamese bonds near term.

Equities continue to look expensive at 25 times this year's

earnings. We would not be aggressive buyers at current levels even though the fundamental long-term story for Vietnam is

very much intact. We see the index largely moving sideways,

albeit in a wide range, over coming months.

Since mid-May, USD/VND has rallied more rapidly. We do

not interpret this as a shift towards an increased pace of

managed depreciation. We think the SBV is repositioning

USD/VND into the centre of the band, consistent with a policy

of accelerated currency regime liberalization. We believe SBV

will allow medium-term appreciation sooner than expected.

Asia

Economics and Strategy

Vietnam Monitor(Issue 2)Inflation remains on a downtrend

8 June 2007

Pieter van der SchaftAsia Local Rates Strategist

+852 2822 4277 [email protected]

Garry Evans*

Equity Strategist

The Hongkong and Shanghai Banking Corporation Limited (HK)


Daniel Hui

FX Strategist


Robert Prior-Wandesforde

Economist+65 6239 0840 [email protected]

Virgil Esguerra

Asia Local Rates Associate Strategist


*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations.

Issuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & Disclosures.This report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, that form part of it.

Table 1: Key data and events

Date Data and events Notes

6 Jun VGB underwriting VND300-700bn11 Jun VGB auction VND300-700bn20 Jun VGB underwriting VND300-700bn21-25 Jun CPI (Jun) 7.3% y/y prior25 Jun VGB auction VND300-700bn25-29 Jun Retail sales (Jun) 22.6% y/y prior25-28 Jun IP (Jun) 17.1% y/y prior25-28 Jun Exports (Jun) 18.4% y/y prior

2-6 Jul GDP (Q2) 7.7% y/y prior24-27 Jul Retail sales (Jul) -24-27 Jul IP (Jul) -24-27 Jul Exports (Jul) -

Source: HSBC

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Key indicators

Chart 1: USD/VND Chart 2: FX reserves

15600

15700

15800

15900

1600016100

16200

Dec-04 Jun-05 Dec-05 Jun-06 Dec-06

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

USD/ VND ( lhs) Y -o -y change ( rhs)

0

5

10

15

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Foreign reserves (USDbn)

Source: HSBC Source: HSBC

Chart 3: Bond yields Chart 4: Headline inflation

6

6.5

7

7.5

8

8.5

9

Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May -07

5yr VGB y ields

0%

2%

4%

6%

8%

10%

12%

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Headline CPI, y-o-y change


Chart 5: HCMH Index Chart 6: GDP growth

0

200

400

600

800

1000

1200

1400

Dec-0

4

Apr-05

Aug-0

5

Dec-0

5

Apr-06

Aug-0

6

Dec-0

6

Apr-07

-50%

0%

50%

100%

150%

200%

HCMSI ( lhs) Y-o-y change (rhs)

4%

5%

6%

7%

8%

9%

10%

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

GDP y-o-y growth


Indicators

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Panicking about prices?

The Vietnamese authorities have fired the first

meaningful shot in their battle against the tidal

wave of liquidity and the potential implications itmay have for inflation. By doubling the reserve

requirement on dong deposits from 5% to 10%

and on foreign currencies from 8% to 10% the

State Bank of Vietnam (SBV) has signalled its

intent to mop up excess funds in the banking

system before they add to lending growth. The

official deposit and lending numbers are a year

out of date, but one suspects they are expanding

well above desired rates at present.

The surprise 30 May move perhaps also points to

a change in the policy priorities of the central

bank, away from supporting economic growth

towards capping monetary growth and inflation.

The SBV officially operates twin objectives

firstly to keep inflation below GDP growth and

secondly to support economic growth. The first

of these is being met at present, while the

slowdown in first quarter GDP growth to 7.7%

from 8.9% would be of some concern.

In explaining the monetary tightening, Central

Bank Governor Thuy argued that monitoring and

constraining inflation is one of the State Banks

main tasks and we need to take some prompt and

intensive measures in order to get inflation under

control.

It is certainly true to say that inflation has moved

higher over recent months, rising from a low of

6.4% in January to 7.3% in May. But the question

is does this reflect a blip in the downward trend,

of the sort which occurred during the second half

of 2005 for example, or a reversal in the trend

itself. Clearly, the SBV fears the latter, given the

probable strength of money growth, although we

think the former is the more likely outcome.

There are several points to make:

Looking at the relationship between monetary

growth and inflation, there doesnt seem to

have been much, if any, link in the past. The

chart below uses quarterly M2 data, which is

available back to 1997 and extends to the

middle of last year. We also looked at the

annual money growth numbers, which we can

get back to 1991, although again there was no

obvious relationship. The same was also

true of M1.

Economics

The State Bank has raised reserve requirements aggressively to

stem money growth and get inflation under control

While inflation has moved higher this year we suspect it will prove

a blip in the downward trend and expect price rises to slow soon

There has been no obvious relationship between money growth

and Vietnamese inflation in the past

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Chart 7: No apparent relationship between money growth &inflation

0

10

20

30

40

50

60

70

Mar-99 Mar-01 Mar-03 Mar-05 Mar-07

% Yr

-4-2024681012

% Yr

M2 money supply growth (RHS)

Inflation (LHS)

Source: CEIC

The contribution from fresh food price

inflation to the headline rate, which amounted

to 1.1ppt in May, is unusually large at present

(see chart). With food price inflation

currently running close to 15% we suspect it

will turn lower fairly soon, particularly now

that the base effects are becoming easier.

Chart 8: Food is adding more than 1ppt to headline inflation

2

3

4

5

6

7

8

9

10

11

May-03 May-04 May-05 May-06 May-07

% Yr

2

4

6

8

10

12% Yr

Headl ine inflation rate Ex-food in flation rate

Source: HSBC, CEIC

The main contributor to the pick-up in

inflation this year has been housing and

construction materials, which has risen from

5.9% in January to 10.6% in May, adding

0.4ppts to the headline rate. This is a

potentially more worrying development,

although if history is any guide then it may be

close to peaking. As the chart below shows,

this component has shown a cyclical pattern

over recent years and is now close to the level

it has peaked at in the past.

Chart 9: Housing inflation close to a peak?

3

4

5

6

7

8

9

10

11

12

03 04 05 06 07

% Yr

Housing & construction material prices

Source: CEIC

Intense global competition has probably

helped drive the downward trend in inflation

seen since mid-2004 and there is little reason

to doubt that this remains a factor.

We have argued (see Vietnam: Going for the

next level, September 2006) that the

trend/sustainable rate of GDP growth in the

country is around 7.5-8%. Although GDP

growth exceeded this rate in 2005-06 the

difference was marginal and followed a

period of sub-trend growth.

Inflation to fall

With all this in mind, and notwithstanding the

strength of money growth, we expect inflation to

start falling again fairly soon. Our year average

CPI forecasts are 7% for 2007 and 6% for 2008.

This is not to say that the rise in the reserve ratio

was unwise but should probably be seen as a

precautionary step, helping to sterilise the huge

capital inflows and recent central bank

intervention in the currency market. In our view,

there remains little reason to panic about a strong,

sustained rise in inflation any time soon.

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On hold for the IPO rush

What has happened

Vietnamese equities have had a volatile ride of

late. The Vietnam index is up 38% y-t-d in USDterms. But, as shown in Chart 10, the market

corrected 23% between March 12 and April 24,

reaching a low of 906. It subsequently rebounded

23% to May 23, and has since shown some signs

of a further correction.

Chart 10: Vietnam stock index

200

400

600

800

1000

1200

1400

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

VNI

Source: Bloomberg

What happened is that foreign investors have

taken a realistic view about valuation, buying

between 900 and 1,000 and trimming positions

when the index rose much above that level. Most

overseas Vietnam country funds are sitting on

significant amounts of cash that they expect to use

in the privatisation IPOs due in the next six

months (see below for more on this); they are not

in a hurry to put the money to work when they see

the market looking too expensive. Domestic retail

investors have largely followed the foreigners

lead.

Table 2: Key stock market data

HCM Hanoi Total

Market cap (USDm) 15,188 4,566 19,754Number of stocks 110 87 197Foreign ownership 27% 14% 24%PE (2006) x 33.6 46.6 36.6PB (2006) x 7.9 6.5 7.5ROE 24.2% 14.8% 21.4%DY 0.9% 0.8% 0.9%

Source: Bloomberg, HCM STC, SSI, BVSC

At the current index level (1040), the PE for Ho

Chi Minh listed stocks based on 2006 earnings is

34x. Assuming 25% EPS growth this year (the

consensus among Vietnam-based fund managers)

and 15% next (roughly the rate of nominal GDP

Equity strategy

Even after its recent roller-coaster ride, the Vietnamese market

looks expensive on 25x this years earnings

We would not be aggressive buyers at this level, but would wait to

buy the big IPOs due over the next six months

Foreign investors should be aware of the new registration system

that will start in August or September

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growth), this equates to a PE of 25x 2007 earnings

and 21x 2008. We remain comfortable with our

target for the VN Index of 900 by end-2007,

based on 18x forward earnings at that time.

We would, therefore, not be aggressive buyers at

the current level even though the fundamental

long-term story for Vietnam is very much intact.

We see the index largely moving sideways, albeit

in a wide range, over the next few months. At the

right price, the IPO offerings would be of interest.

Recent developments

Regulatory issues

The authorities have released draft guidelines for

foreign investor registration. This will replace the

current dual system of (1) a securities trading

code for listed stocks, and (2) capital contribution

account for OTC stocks. The documents that will

be required for registration are not particularly

onerous (they seem to be based on Taiwans FII

system), and the unifying of the two systems will

simplify procedures somewhat.

The unknowns, however, are whether the

authorities will use the registration system to slow

inflows at times when they feel the market has

gotten overheated, and whether they will reject

applications from investors they see as

undesirable, such as hedge funds. The new system

will probably be implemented from August or

September.

Turnover and liquidity

The rally in the market in the past month has

taken daily trading value on the Ho Chi Minh

market back since the start of May to an average

of USD44m a day, although this is still well

below the heady levels of March (see Chart 11).

Over the past three months, 11 stocks have had an

average daily turnover of USD1m or more,

making them liquid enough for many foreigninvestors (see Table 5, for key data on the largest

stocks).

Chart 11: Daily trading on Ho Chi Minh (USDm)

0

10

20

30

40

50

60

70

80

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Daily traded value (USD mn)

Source: Bloomberg

Foreign investor buying has picked up since late

February/early March, when foreigners were

small net sellers for about three weeks. In May,

foreigners bought net USD150m, close to the

level of December-February (Chart 12). One

problem for foreign investors is that many of the

best-quality names have hit their foreign

ownership limits (49% for listed companies, 30%

for banks and OTC stocks). Of the 15 largest

stocks by market cap, five can no longer be

bought by foreigners (see Table 5 for details).

Chart 12: Foreign net buying of Vietnamese equities

0

50

100

150

200

250

300

350

400

Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

USD

m

Source: Bloomberg

IPO timetable

Many overseas country funds are saving cash to

buy a skew of privatisation issues due over the

next few months.

The first major privatisation this year, for Bao

Viet Insurance, was completed successfully on

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June 4, raising USD271m, with 23% of the

offering going to foreign investors. The realised

price was twice the initial reserve price.

The timetable of major IPOs for the rest of the

year is shown in Table 3. A number of these will

have overseas tranches for the first time, and

foreign investment banks are widely expected to

be appointed as lead managers on the issues.

Table 3: Major IPO timetable

Company Possible IPO date

Vietcombank Aug-07Industrial & Commercial Bank Oct-07Mekong Housing Bank Oct-07Mobifone Q4BIDV Q4Saigon Beer ?Hanoi Beer ?Vinafone ?

Source: Media reports including Bloomberg, Vietnam Investment Review, Viet Nam News

Country funds

There continue to be a significant number of new

Vietnam country funds set up worldwide. We

count 13 funds launched since the start of April

this year, and 22 since the beginning of the year

(giving a total of 52 in existence). Not all the

funds report their NAV but, for those that do, total

assets now equal USD6bn. Given total foreign

ownership of listed companies on the two

exchanges of only USD4.8bn, this suggests that a

lot of the money raised is still held in cash

(although some, of course, is invested in OTC

stocks or other assets such as real estate).

A look at new country funds shows a number of

trends. Korea is a major source of inflows into

Vietnamese equities: since the start of the year

eight new funds there have raised well over

USD1bn. The number of countries with Vietnam

funds has increased: recently country funds have

been set up in Singapore, Malaysia, Japan and

Israel. The largest Vietnam-based money

managers, such as Dragon Capital, are

diversifying their product range as presumably

they see relatively little value in a balanced fund

of listed stocks. These managers have recently

launched specialist funds in resources, energy,

infrastructure and real estate.

With the Vietnamese market still somewhat small

for most institutional investors, country funds will

continue to be the major source of liquidity. That

provides significant downside support, since these

funds are unlikely to be sellers. It also guarantees

that the forthcoming IPOs will get a good

reception.

New index

Given the problem with trying to replicate the VN

Index (which is not free float adjusted), many

investors will be interested in the FTSE Vietnam

Index Series launched in May. The FTSE

Vietnam Index is adjusted for investibility and

stocks are screened for liquidity. It does not,

however, get over the problem of stocks that

foreigners can no longer buy since foreign

ceilings have been reached. It also has the snag

that it is limited to Ho Chi Minh listed stocks and

therefore misses a number of investible names

listed in Hanoi.

But now that FTSE has moved, does it suggest

that MSCI will have to consider including

Vietnam in its indexes over the next few months?

There are now four Vietnamese stocks with a

free-float adjusted market cap of greater than

USD500m. Add a couple more, once theforthcoming IPOs are complete, and Vietnam

would seem to fulfil MSCIs (undisclosed)

inclusion criteria.

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Table 4: Vietnam country funds set up since April 2007

BBG Code Name Fund Management Co Incept Date Location

VIETRES KY VIETNAM RESOURCE INV HLD LTD Dragon Capital Management Ltd/ 8/1/2007 CaymanSGVIEOP KY SGAM VIETNAM OPP FUND SG Asset Management Singapore 6/21/2007 CaymanTIMVIET LE T.I.M VIETNAM TIGER FUND IFM Independent Fund Management 6/4/2007 Liechtenstein3697677 KS KB VIETNAM FOCUS BALCND-FD-C Kookmin 6/1/2007 Korea3697685 KS KB VIETNAM FOCUS BALCND-A Kookmin 6/1/2007 Korea79212075 JN SUMI M VIETAM FUND 2007-5 Sumitomo Mitsui Asset Management 5/31/2007 JapanAMCFMVP LE AMCFM VIETNAM EQUITY FUND-P IFAG Institutionelle Fondsleit 5/31/2007 LiechtensteinMAXVIET KY MAXFORD GROWTH-VIETNAM FOCUS Maxford Investment Management 5/16/2007 Caymann/a VIETNAM AZALEA FUND Mekong Capital 5/1/2007 VietnamCAASCCA LX CAF-ASEAN NEW MARKETS-CA Credit Agricole Asset Management 4/30/2007 LuxembourgFULVIEA KY FULLERTON VIETNAM FUND - A Ful lerton Fund Management Co L 4/23/2007 CaymanHWAINCH MK HWANG-DBS INDOCHINA FUND Hwang-DBS Investment Management 4/12/2007 Malaysia7671343 KS TONGYANG VIETNAM PRIVATZN 1 Tong Yang Investment Trust Man 4/2/2007 Korea

Source: HSBC, Bloomberg

Table 5: Key valuation data for largest listed Vietnamese stocks

Code Company Exchange Mkt cap(USDm)

Ave dailyt/over

(USDm)

Foreignownership

Foreignlimit

Room forforeignbuying

(USDm)

PE (2006) Chg 3M

VNM Vinamilk HCM 2,048 2.62 44% 49% 103 42.0 -36%STB Sacombank HCM 2,026 8.35 30% 30% 0 53.8 -5%PPC Pha Lai Thermal Power JS Company HCM 1,371 1.26 6% 49% 588 16.9 -28%FPT FPT Corp. HCM 1,304 4.41 20% 49% 376 60.0 16%ACB AsiaCommercialBank Hanoi 1,105 1.03 30% 30% 0 n/a -22%PVD PVDrilling HCM 1,099 2.74 15% 49% 370 117.5 -13%

SSI Sai Gon Securities Investment Hanoi 545 4.46 12% 49% 202 n/a -5%ITA Tan Tao Industrial Park HCM 541 1.25 19% 49% 162 45.8 74%VSH VinhSon HydroPower HCM 541 0.82 23% 49% 142 31.8 4%GMD Gemadept HCM 440 1.51 49% 49% 0 38.4 -10%KDC South Kinh Do HCM 438 0.78 38% 49% 47 44.5 74%SAM Sacom Cable HCM 405 0.78 49% 49% 0 35.2 142%REE REE Corporation HCM 396 3.35 49% 49% 0 28.2 -13%BMI BaoMinh Insurance Hanoi 358 0.20 8% 49% 146 n/a 358%BVS Bao Viet Securities JS Company Hanoi 353 0.50 23% 49% 93 n/a -17%SJS Sudico HCM 277 3.19 11% 49% 106 52.9 -28%BTS But Son Cement Hanoi 250 0.09 6% 49% 107 n/a -17%VIP Vipco HCM 230 0.28 24% 49% 57 44.7 -35%TDH Thu Duc House HCM 222 0.88 49% 49% 0 23.4 -40%BCC Bim Son Cement Hanoi 217 0.27 10% 49% 84 n/a -19%MPC Minh Phu Seafood Joint stock Co Hanoi 208 0.34 2% 49% 97 n/a -16%VNR Vinare Hanoi 207 0.05 7% 49% 86 n/a 4%

Source: Bloomberg, HCM STC, BVSC, SSI

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Recent SBV measures to mop up excess liquidity

by raising (and equalising) reserve requirements

on VND and FX deposits to 10% for deposits

shorter than 12 months and 4% for 12-24month

deposits, and cap the amount of unlisted bank debt

that can be held by offshore investors to 50% have

had limited impact on Vietnamese government

and bank bonds.

Despite the absence of official data on bank

deposits, the reserve requirement hikes are

estimated to mop up approximately VND40-50trn

in bank liquidity out of total excess liquidity of

VND60-80trn. Excess liquidity will, however,

continue to rise sharply further given our estimate

for approximately USD15bn of foreign capital

inflows to enter Vietnam during 2007. In turn, the

reserve requirement hikes, which were effective 1

June, have only led to a modest 20bp rise in the

call money rate to 3.55-3.8% at present, and our

traders onshore do not expect the call money rate

to reach 5% anymore during Q3 despite an

expected pick-up in loan disbursements from July

onwards to finance infrastructure projects.

SBVs cap on the sale of unlisted bank debt to

offshore investors appears to have been included

in a clarification letter to a foreign bank, and is

therefore not a formal regulation. It is also

difficult to see how these regulations can be

enforced except perhaps by capping the amount ofdebt sold to offshore investors during primary

issuance. Hence, an extension and/or strict

enforcement of this regulation to corporate

bonds is unlikely, in our opinion.

That being said, the Vietnamese authorities will

continue to face a challenge on how to control

excess liquidity, while maintaining their stated 1%

annual depreciation path for the VND in the face

of rising inflation. Although our economist

believes that the recent rise in headline inflation is

temporary (please see Economics section), it is

unlikely that the SBV can control rising food and

energy prices through monetary sterilisation

measures. Nevertheless, recent SBV moves may

have been intended to show that they are doing

something about inflation and the Vietnamese

authorities may well follow up with further

mainly administrative measures in an attempt to

control excess liquidity and inflation before

allowing a strengthening of the VND in 2008.

Chart 13. Vietnam bond yields have risen sharply

6

6.5

7

7.5

8

8.5

9

Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May -07

5yr VGB yields

Source: Bloomberg

Fixed income strategy

Liquidity remains flush despite SBVs liquidity tightening measures

5yr VGBs likely to remain range-bound around 7%

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In the meantime, 5yr VGBs are expected to trade

range-bound around 7% with ample support from

onshore investors (given approximately 350bp

spread pick-up over the call money rate) and

offshore investors considering that Vietnamese

bonds provide an attractive call option on

medium-term VND appreciation.

Table 6. Vietnam bond yields

Tenor Yield Size

Vietnam Government Bond (VGB) 5yr 7.05% -10yr 7.50% -Electricity of Vietnam 10yr 8.60% 1 trnDevelopment Bank of Vietnam 5yr 7.15% 8trn

10yr 7.60% 0.6trn15yr 7.80% 0.1trn

Bank for Investment & Development 10nc5 7.70% 1.1trn15nc10 8.20% 1.1trn

Vinashin 10yr 8.65% 3trn

Source: HSBC Vietnam

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Since mid-May, USD/VND has rallied at a more

rapid rate. Market participants, however, should

not interpret this as a policy-shift towards an

increased pace of managed depreciation (beyond

the conventional 1% p.a. pace). Instead, an

examination of the SBVs daily band setting

against this movement in spot, suggests that the

SBV is repositioning USD/VND back into the

centre of the band. This is consistent with a view

of accelerated currency regime liberalization. We

continue to believe that SBV will allow medium-

term appreciation sooner than expected (see

VND appreciation coming soon, 21 May 2007).

We believe that upside to our view is largely

limited to the risk that SBV delivers on its implicit

policy of 1% annual depreciation. We continue to

advise gaining exposure to VND appreciation

risk. Now that intra-band repositioning has largely

been completed (chart below), entry into long

VND positions are more favourable now.

An evolving currency regime

Shifting balance-of-payments dynamics,

combined with a recent growing capital inflows is

necessitating an acceleration of currency regime

liberalization. In the past six months, the

oversupply of dollars and undersupply of VND

has led the USD/VND to pressure the floor of the

official trading band. These conditions have

proved problematic for the currency market, with

FX strategy

A recent acceleration in VND depreciation represents intra-band

repositioning, not a signal for faster depreciation

Liberalization of the currency regime is happening

Entry into long VND positions more favourable now

Chart 14: USD/VND

15900

15950

16000

16050

16100

16150

16200

16250

Oct-06 Dec-06 Feb-07 Apr-07 Jun-07Fix USD/VND Close Ceiling Floor

Band widening

Source: Reuters

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SBV purchasing insufficient USD to keep the

VND market from clearing properly (for details,

see VND appreciation coming soon, 21 May

2007).

It appears that the SBV has decided to address this

imbalance by buying USD more aggressively,

dragging the USD/VND rate away from the edge

of the band, back towards the centre (Chart 15).

From a policy standpoint, there are two

implications to this recent development. First,

shifting the burden of exchange rate management

from a reliance on trading band restrictions to

more direct intervention will give SBV a more

flexible and market-based method in guiding

exchange rates, while maintaining liquidity in the

market.

However, at the same time, increased selling ofVND will increase the liquidity management

burden for an SBV already struggling to manage

inflation risks. It is due to this last point, that we

believe VND appreciation may come about

sooner than expected.

Entry opportunity?

In repositioning USD/VND to the midpoint of the

band, besides more aggressive buying of USD to

push the USD/VND rate higher, the SBV has also

been modestly re-fixing the band lower (Chart

14). However, the end result is that, on the

surface, VND has still been depreciating more

rapidly against the USD in the past few weeks (at

around a 3.5% p.a. pace).

Investors should not extrapolate this into trend

that creates the expectation that USD/VND will

end the year much higher (Chart 16). With

repositioning now largely over (and USD/VND

already within 17pips of the band centre, from an

average 80pips three weeks ago), we feel the

further upside to USD/VND is limited to the

additional depreciation required to hit the impliedSBV policy target of 1% depreciation in 2007

(about 122pips more), implying a much slower

pace of USD/VND depreciation from here (Chart

16). As such, entry into long VND positions are

more favourable now for medium-term investors

looking to gain exposure to appreciation risk.

Chart 15: USD/VND Intra-band positioning Chart 16: USD/VND

-150

-100

-50

0

50

100

Jun-06 Sep-06 Dec-06 Mar-07 Jun-07

close - fix Band Band

15950

16050

16150

16250

16350

16450

16550

16650

Nov-06 Jan-07 Apr-07 Jul-07 Oct-07

USD/VND HSBC f'cst1% deprec trend Late may pace

Source: Reuters, HSBC Source: Reuters, HSBC

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Macro framework

2002 2003 2004 2005 2006 2007f 2008f

Production, demand and employmentGDP growth (% y-o-y) 7.1 7.3 7.8 8.4 8.2 7.8 8.0Nominal GDP (USDbn) 35.1 39.6 45.5 52.9 61.6 69.6 78.5GDP per capita (USD) 440 489 555 637 732 817 909Private consumption (% y-o-y) 7.6 8.0 7.1 7.5 7.0 6.5 6.7Government consumption (% y-o-y) 5.4 7.2 7.8 7.9 5.0 5.0 6.0Investment (% y-o-y) 12.9 11.9 10.4 11.0 12.0 10.0 12.0Industrial production (% y-o-y) 14.24 19.80 17.64 25.53 13.40 8.8 9.3Gross domestic saving (% GDP) 32.0 30.5 33.5 36.6 36.3 36.5 37.0Unemployment rate, end-year (%) 6.01 5.78 5.60 5.31 4.40 4.2 4.0PricesCPI, average (% y-o-y) 4.1 3.1 7.8 8.3 7.5 6.5 6.0CPI, end-year (% y-o-y) 4.0 2.9 9.7 8.8 6.6 6.3 5.8PPI (% y-o-y) -0.3 1.8 2.7 -1.9 3.0 0.6 0.1Money, FX & interest ratesBroad money supply M2, average (% y-o-y) 17.6 24.9 29.5 29.8 25.0 20.0 25.0Real private sector credit growth (% y-o-y) 22.2 28.4 41.7 40.0 35.0 25.0 30.0Prime lending rate, end-year (%) 9.48 9.52 9.90 11.33 11.00 10.50 10.505yr yield, end-year (%) -- 8.30 8.50 8.75 8.30 7.00 6.75VND /USD, end-year 15,363 15,615 15,738 15,878 16,052 16,237 16,399VND /USD, average 15,258 15,500 15,718 15,832 15,986 16,161 15,999VND /EUR, end-year 15,695 19,230 21,105 18,840 21,188 23,544 23,779VND /EUR, average 14,431 17,538 19,540 19,750 20,191 22,385 22,964

External sectorMerchandise exports (USDbn) 16.7 20.1 26.5 32.4 39.9 44.7 52.7Merchandise imports (USDbn) 17.8 22.7 28.8 33.3 40.1 46.1 54.8Trade balance (USDbn) -1.1 -2.6 -2.3 -0.8 -0.2 -1.4 -2.1Current account balance (USDbn) -0.7 -1.9 -1.6 0.2 0.4 -0.8 -1.5Current account balance (% GDP) -1.9 -4.9 -3.4 0.4 0.7 -1.2 -2.0Net FDI (USDbn) 2.0 1.9 1.9 2.0 3.0 3.0 3.0Net FDI (% GDP) 5.8 4.8 4.1 3.7 4.9 4.3 3.8Current account balance plus FDI (% GDP) 3.8 -0.1 0.7 4.1 5.5 3.1 1.9Exports (% y-o-y) 11.2 20.6 31.4 22.5 22.9 12.0 18.0Imports (% y-o-y) 23.3 28.0 26.6 15.7 20.4 15.0 19.0International FX reserves (USDbn) 4.2 6.4 7.2 9.2 15.0 20.0 25.0Import cover (months) 2.9 3.4 3.0 3.3 4.5 5.2 5.5

Public and external solvency indicatorsGross external debt (USDbn) 12.2 13.3 15.5 16.9 19.3 21.6 23.0Short term external debt (% of int'l reserves) 26.7 18.0 14.0 12.7 6.7 5.0 4.0Private sector external debt (USDbn) 2.5 2.7 3.1 2.9 3.3 3.6 4.0Consolidated government balance (% GDP) -3.9 -4.9 -3.3 -2.6 -2.0 -1.9 -1.7Central government balance (% GDP) -3.5 -6.1 -3.6 -3.0 -2.1 -2.1 -2.3

Gross public domestic debt (VND trn) 57 83 96 118 141 163 186Gross public domestic debt (% GDP) 10.6 13.5 13.4 14.1 14.3 14.5 14.5Gross public external debt (USDbn) 9.7 10.6 12.4 14.0 16.0 18.0 19.0Gross public external debt (% GDP) 27.6 26.8 27.2 26.5 26.0 25.9 24.2

Source: HSBC

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Disclosure appendix

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's

decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other

considerations.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at

www.hsbcnet.com/research.

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein

accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was,

is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report:

Garry Evans, Virgil Esguerra, Robert Prior-Wandesforde, Pieter Van Der Schaft and Daniel Hui

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures

1 This report is dated as at 08 June 2007.2 All market data included in this report are dated as at close 06 June 2007, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Researchoperate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wallprocedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or

price sensitive information is handled in an appropriate manner.

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Disclaimer

*Legal entities as at 5 September 2006

HSBC Bank Middle East Limited, Dubai; The Hongkong and Shanghai Banking Corporation

Limited, Hong Kong; HSBC Securities (Asia) Limited, Taipei Branch; HSBC Securities (Canada)

Inc, Toronto; HSBC Bank, Paris branch; HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000

HSBC Bank (RR), Moscow; HSBC Securities and Capital Markets (India) Private Limited,

Mumbai; HSBC Securities (Japan) Limited, Tokyo; HSBC Securities Egypt S.A.E., Cairo; HSBC

Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai

Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking

Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) (Pty) Ltd,

Johannesburg; HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid,

Milan, Stockholm, Tel Aviv, HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul

Degerler A.S., Istanbul; HSBC Stockbroking (Australia) Pty Limited.

Issuer of report

The Hongkong and ShanghaiBanking Corporation Limited

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Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliatesand/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment)

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Global Emerging Markets (GEMs)

Philip PooleHead of Research & Chief Economist, GEMs+44 20 7991 5641 [email protected]

John LomaxHead of Equity Strategy, GEMs+44 20 7992 3712 [email protected]

Regis Chatellier+44 20 7991 5673 [email protected]

Dafydd Lewis+44 20 7992 3685 [email protected]

Wietse Nijenhuis+44 20 7992 3680 [email protected]

Asia

Peter MorganChief Economist, Pan-Asia

+85 22 822 4870 [email protected]

Dilip ShahaniHead of Fixed Income & Credit Research, Asia+852 2822 4520 [email protected]

Hongbin Qu+852 2822 2025 [email protected]

Garry EvansHead of Equity Strategy, Pan-Asia


Richard Yetsenga+852 2996 6565 [email protected]

Robert Prior-Wandesforde+65 62 390 840 [email protected]

Frederic Neumann+85 22 822 4556 [email protected]

Devendran Mahendran+852 2822 4521 [email protected]

Perry Kojodjojo+852 2996 6568 [email protected]

Manas Paul


Christopher Wong


Pieter van der Schaft


Virgil Esguerra


Daniel Hui


Eastern Europe, Middle East and Africa (EMEA)

Juliet SampsonChief Economist, EEMEA


Alexander Morozov


Murat Ulgen


Esra Erisir+90 212 366 1615 [email protected]

Simon Williams+97 145 077 614 [email protected]

Latin America

Alexandre Bassoli+55 11 3371 8184 [email protected]

Javier Finkman+54 11 4344 8144 [email protected]

Jonathan Heath+52 55 5721 2176 [email protected]

Clyde Wardle+1 212 525 3345 [email protected]

Benito Berber+1 212 525 3124 [email protected]

Marjorie Hernandez+1 212 525 4109 [email protected]

Hernan M Yellati+54 11 4348 5759 [email protected]

Luis F Cezario


Juan Pedro Trevio


Ivonne Ordoez


Arcelia Jimenez


GEMs Macro & Strategy Research Team

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