Inevitable impact of the US-China trade war on Vietnam

Talking about the impact of the escalating US-China trade war along with the volatile currency war between these two countries, PHAN DUNG KHANH (photo), Investment Consulting Director of Maybank Kim Eng. Securities, said that depreciation of CNY will certainly influence Vietnam’s economy significantly.

Illustrative photo.

Illustrative photo.

In reality, whenever people expect positive results from negotiations, the results usually turn out just the opposite.  Ripples of the US-China trade war are even being felt across Europe and Asia. All of these things have made investors convert their huge liquidity in safe havens like gold, government bonds and have also negatively impacted the government bond interest rate of some countries.

Theoretically, borrowers have to pay interest to lenders, which in practice is actually the reverse. There are about USD 13,000bn of government bonds having negative interest rate which is shown in detail on Bloomberg Barclays Index.

The USD/VND trading exchange rate has been stable over the last few years but the reference rate has increased gradually since beginning of 2019. Usually, the State Bank will adjust the USD/VND reference rate when China depreciates its currency.

Vietnam is bordered by China in the North. Hence, it is very easy for China to export their products to Vietnam. The State Bank is expected to adjust USD/VND rate to offset with the depreciation of CNY to prevent these exports. The USD/VND reference rate adjustment will impact negatively the national debt, however, the result will be more negative if the State Bank does nothing.

JOURNALIST: - In your opinion, how will the CNY depreciation impact Vietnam’s economy and foreign exchange policy?

PHAN DUNG KHANH: - Vietnam will certainly be impacted negatively. Recently, China has pushed up its exports to many Asian countries, and exports from China to just Vietnam alone have also surged significantly. In the first seven months, China was the biggest foreign investor in Vietnam. This has created a worry that China may use Vietnam as a transit middle place to export to USA or even some countries in Europe.

The biggest risk and issue is that Vietnamese enterprises now have to compete with Chinese enterprises within the Vietnamese market.
Furthermore, the USD/VND exchange rate will also be impacted by the decrease in the interest rates of many central banks across the globe, who follow FED to ease their money policy to support their trade. We may face two types of risks, which will include a trade war risk and a currency war risk, both at the same time. It is hard to expect that anything good will come out of this scenario.

China is one of the biggest partners of Vietnam in terms of foreign trade and investment. Although, the main currency in settlements is USD, the depreciation of CNY will still impact negatively the USD/VND exchange rate as well as the foreign exchange policy. The biggest risk and issue is that Vietnamese enterprises now have to compete with Chinese enterprises within the Vietnamese market.

The depreciation of CNY may impact other dimensions of Vietnam, such as creating new issues to resolve or getting Vietnam involved in the trade war and currency war.

- What should we do to minimize the impact of the US-China trade war?

- Beside continuing to follow the current successful policies, the State Bank should increase foreign reserves to help stabilize the exchange rate. The policy to maintain the deposit rate of gold and foreign currencies at 0% or the strategy to build the national brand of gold bar has supported stabilization of USD/VND exchange rate.

The foreign reserves should be diversified. The State Bank should reduce the amount of paper money and increase gold amounts in their reserves, same as other countries. Some countries have been purchasing gold for their reserves for the last two years. Such as Ecuador, which had never reserved gold, has now started to buy gold for their national reserves. For Vietnam, a strong foreign reserve and a flexible money policy will help increase market confidence and minimize the impact of outside occurrences.

Vietnam should have more policies to attract FDI. The registered FDI in the first seven months has posted a sharp drop. There are many reasons for this drop, including the investment concentration of investors in gold, government bonds and digital currencies. However, if Vietnam has more favorable policies, the FDI and FII will increase and help maintain a sustainable growth in the economy.

- Thank you very much.

Hai Ho (Interviewer)

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