No need to depreciate VND

In a discussion with Sai Gon Investment, Dr. Can Van Luc (photo), member of National Financial and Monetary Policy Advisory Council, said that the adjustment of CNY is not so bad for Vietnam to depreciate the VND now.

Illustrative photo.

Illustrative photo.

JOURNALIST: - Some experts say that Vietnam should depreciate the VND to improve competiveness of Vietnamese products and support exporters. What is your opinion?

Dr. CAN VAN LUC: - Firstly, we should understand that currency depreciation will impact the economy both negatively and positively. For Vietnam, VND depreciation will support exports but it will also have negative impact on imports, sovereign debts and inflation.

Secondly, the relationship between VND depreciation and export growth is not always strong. Our country is dependent on exports, however, the more we export, the more we import as well, given the sub-standard development of our supporting industries.

Most exports of Vietnam come from the FDI sectors which currently contribute 70% of total exports of Vietnam. However, FDI sectors also import huge amounts of materials. Hence, we are not sure whether exports will benefit from VND depreciation or not.

Thirdly, Vietnam’s current currency policy is quite flexible and proactive. The reference exchange rate is adjusted every day. We can say that our foreign currency policy is linked to the market strongly, and reflects well the supply and demand. Hence, the VND adjustment should be based on real market conditions.

Fourthly, CNY is just one of eight currencies which are used for calculating the daily reference exchange rate of USD/VND. Even though CNY has depreciated strongly, we are still based on this currency basket to determine the value of the VND. We do not depend only on CNY.

In practice, most contracts between Vietnam and China are settled in USD. When CNY depreciates, the export products of China will get more advantages, however, it is not the key basis for us to depreciate the VND.

- In your opinion, will CNY continue being depreciated in coming times?

- Some people say that the Chinese government is using CNY as a tool in the trade war with USA. However, I think China will not let CNY depreciate more in the long term.

There are three reasons to explain this thought. Firstly, China does not really want to have a trade war with the US, hence, China is not happy when labeled as a currency manipulating country by the US. Secondly, China is in the process to internationalize its CNY, hence, China needs to make its value more stable. Thirdly, the Chinese government is afraid of stronger outflow of investments from China when it depreciates the CNY more.

In 2015, when China depreciated the CNY, about USD 300bn were withdrawn from China and now China does not want a repeat of a similar situation.

- What policy should Vietnam follow amidst the complications in the world now?

- I think we should keep doing what we have done over the last times, meaning a flexible currency policy. Frankly speaking, VND value has been stable over the last 8 months. Up to 25 August, VND has only depreciated 0.14%, compared to 4.2% of depreciation in CNY.

I think the CNY depreciation is not the purpose of the Chinese government. It is more impacted by the market conditions and the escalating US-China trade war. Hence, we need to understand clearly the various reasons to have more suitable responses.

When CNY depreciates, the export products from China will face more advantages, however, it is not the key factor for us to depreciate the VND.
The supply and demand of foreign currency is now quite stable. The foreign reserves of the State Bank are considered enough to stabilize the foreign currency market in coming times. However, the government needs to continue focusing on risk management, including financial risk, foreign exchange risk, interest rate risk and also on improving the cooperation between banks and enterprises to manage these risks effectively.

- What do you think the next moves in the US-China trade war will be in coming times and what solutions should Vietnam have ready to be well prepared for any eventuality?

- Most experts think that the US-China trade war will last for a long time, become related to national competing strategy and directly link to intellectual rights, technology development and trade deficit.

As to the question whether both sides will reach a negotiation point in the next meeting or not, I think the result will be modest. The probability that the two countries will achieve a common agreement is very low. However, we do not exclude the chances that the two countries may stop their animosities, extend the negotiation period, commit to export again or not use currency tool as bargain. However, in the long term, it is expected to be the toughest trade war.

In regards to Vietnam, the escalating US-China trade war has impacted negatively on all the exports. However, in the long term, we should not worry too much as the investment flow from China to Vietnam will create new export opportunities for the country. Hence, the exports are expected to return to a strong growth cycle soon, like it used to be in previous times.

Furthermore, the trade war may turn Vietnam into a place for China to evade taxes from the US. The US government believes that Vietnam is one of the countries that has taken advantage of the US tax system the most over the years. Hence, the government should strictly resolve the problem of using Vietnam as location for tax evasion.

- Thank you very much.

Luu Thuy

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