Vietnam will keep the country’s two stock exchanges in Hanoi and Ho Chi Minh City separate under a wholly owned state company that will be set up by 2020, abandoning an earlier plan to merge the two bourses.

The government said on Sunday that the new company, Vietnam Stock Exchange, will be headquartered in Hanoi under the ownership of the Ministry of Finance.

The merger would have created a single exchange in Hanoi, which is considered Vietnam's political and cultural center, rather than in the business capital of Ho Chi Minh City, home to the communist country's first and most active stock exchange.

The government appears to have been forced to give up on the merger plan owing to disagreement between the two exchanges over where the combined exchange would be located.

Under the new plan, the two exchanges "will operate independently, under the control and ownership of the new company," which will work on a privatization effort after 2023, according to the statement.

The main role of Vietnam Stock Exchange will be issuing regulations on stock listings and trading, monitoring the stock market and supervising its two subsidiaries. The exchange company will become more professional than the individual markets as a result of the reorganization, Finance Minister Dinh Tien Dung said earlier this year.

But analysts say the failure of the merger plan could discourage foreign investors hoping for greater liquidity and more investment opportunities in a bigger Vietnamese stock market. The new holding company model could prove difficult to operate, as it adds an extra level of management that could slow down processes and increase costs for market members, according to an expert who asked not to be named.

Phan Huy Hoan, a local investor, worries that investors will receive no benefit from the new ownership structure, which will increase costs for listed companies while providing no guarantee of greater market transparency.

The new plan might also weigh on the country's effort to privatize state-owned enterprises. Hanoi is on the brink of missing its target of reducing the number of wholly owned state enterprises to 100 by 2020 from around 500 as of December, and will need to move faster in 2019 and 2020 if it is to reach the goal.

Vietnam established the Ho Chi Minh City Stock Exchange in 1998, followed by the Hanoi Stock Exchange in 2009.

Located in southern Vietnam, the Ho Chi Minh City exchange has grown into the main market for state-owned enterprises to raise funds and hold initial public offerings. Foreign investors follow the VN30 and the VN-Index, which include such blue chips as Vietnam Dairy Products, Vietcombank, Vingroup, Vietjet and Masan.

The Ho Chi Minh City exchange accounted for 93% of the two main exchanges' total market capitalization of about $131 billion as of December. This figure does not include corporate bonds and companies listed on a secondary market known as the unlisted public company market.

Meanwhile, the Hanoi bourse focuses on small and midsize enterprises, bonds and derivatives.

But having two separate stock exchanges was long criticized as increasing costs for listed companies and confusing investors.

The government's plan to merge the two exchanges as a cost-cutting move was discussed in 2011 but announced only in 2016. Teams at the two exchanges reportedly worked on the plan for years. Tran Van Dung, now the chairman of the State Securities Commission, told Nikkei when he led the Ho Chi Minh bourse two years ago that the merger was very important and would "create a one-stop-shop securities market for investors as Vietnam becomes deeply integrated in the global economy."

But the merger proposal, which would have made the Ho Chi Minh City exchange a branch of a unified trading floor, sparked debate among analysts because it is the first and larger bourse.

Many saw the move as an attempt by Hanoi to gain control of financial activities that would be more effectively conducted in the southern city. Market watchers said that as Vietnam's commercial hub, Ho Chi Minh City offers a more open market than the political center of Hanoi.

Vietnam has been working to advance to emerging market status from frontier market under MSCI's market classifications. A former leader of the Ho Chi Minh City exchange said that the integrated management should be located here, where it had invested heavily in the trading systems and technology infrastructure needed for the upgrade.

Vietnam has 376 listed companies on the Hanoi exchange and 377 companies on Ho Chi Minh City bourses. As of last Friday, the exchanges had a market capitalization of $8 billion and $124 billion, respectively.

Nikkei Asian Review - January 15, 2019