HANOI: Among the many bubbles that dot the global finance landscape, the case of Vietnam hardly stands out. But Asia's newest market to emerge from socialism could find that excess, though certainly preferable to want, comes with its own troubles.

Vietnam had a long-gestating stock market that finally flowered at a time of abundant global liquidity. But cautious Vietnamese could be forgiven if they gave a worried welcome to the thousand or so foreign fund managers who crammed into a hotel here last month to hear the virtues of a nation whose stock market had doubled since November and quadrupled since early 2006. For sure, that market has eased in recent days, but the leading stocks still sell for 40 to 50 times earnings, high even by China's current standard.

Vietnam's economy has had the highest sustained growth in Asia other than China, but with few of that country's investment excesses, pollution problems and dangerous income imbalances. Vietnam has just joined the World Trade Organization, and Hanoi is committed to further reform, thanks to a demanding bilateral deal with the United States. Vietnam has a new generation of political leaders, a trade-favorable geography and the best demographics in East Asia. Its financial system is better developed than was China's at the same stage of economic growth and should be further boosted by the gradual liberalization of the business foreign banks can conduct. A flood of listings of partially privatized state enterprises has deepened the stock market, and more big listings are in the pipeline. Earnings are growing fast as enterprises slough off socialist values. And the bond market is developing.

Nevertheless, foreign adulation can be a dangerous thing, as Thailand and Malaysia discovered as they went from boom to bust in the 1990s. It is not so much that stock prices fall; China has had market busts that hurt investors but not the economy. The worry for Vietnam is that the sheer strength of the money tide could do huge damage to the overall financial system when that tide ebbs.

There is now $2 billion to $3 billion of portfolio investment earmarked for Vietnam and looking for an entry point. That is in addition to foreign direct investment, of which some $10 billion has been promised and $2 billion actually made over the past year, and money aiming to enter the real-estate market. Foreign money is not only swelling the country's money supply, growing at worrying rates, the local liquidity has helped fuel the domestic stock fever, Vietnam's first to have attracted mass participation, particularly in Ho Chi Minh City, where the major stock market is located.

None of this would matter too much if other aspects of the financial system were as well developed as the stock market. But the banking system has a long way to go. The major state banks may be protected by the government, but their nonperforming loans are believed to be closer to 20 percent than the official 5 percent. As for the 35 or so other banks, many are undercapitalized and prone to using their own capital for stock-market speculation. Bank stocks themselves are among the mostly heavily traded. Entry of foreign banks, as happened elsewhere in Asia, will help the sector's long-term development, but in the short term may cause increased competition to lend and hence lower standards for borrowers.

Vietnam also has inadequate foreign-exchange reserves relative to its new international exposure. At $13 billion are barely equal to the value of three months' imports, the IMF guideline for minimum exchange reserves. Another potential weakness is that about 25 percent of bank deposits are in foreign currency. As has happened elsewhere in the past, the local borrowers of foreign currency could get into difficulties if the exchange rate were to decline drastically. That is not a present danger, but always a possibility.

Having seen the results of Thailand's recent attempt to stem foreign capital inflow, Vietnam is reluctant to impose new controls. With luck the market will come off the boil as new listings absorb liquidity. Hopefully, there will not be the 50 percent to 70 percent fall in prices that could kill off local and foreign interest for several years. The fact is that Vietnam does need vast amounts of capital for energy and infrastructure and the government intends to use the market as a major funding avenue, for example by listing individual power stations.

Undue pessimism is not justified. Vietnam has always shown a cautious, step-by-step approach to economic reform and is unlikely to be rushed into over-rapid liberalization. Rather than outdo China, it appears content with growth of 7 percent to 8 percent. Nonetheless, even mature investors can find that rivers of money wash away years of hard-won experience. So Vietnam's leaders will need to be particularly awake to the fact that these are not normal times in global finance.