Monetary policies in Vietnam a hot topic

After US cut its interest rate by 0.25%, China depreciated the CNY. These two events have raised a question for Vietnam’s monetary policy, and how it should respond. Sai Gon Investment had a discussion with Dr. Nguyen Tri Hieu (photo) to further clarify this issue.

Illustrative photo.

Illustrative photo.

Odds are in favor of the US

JOURNALIST: - According to USA, China has depreciated the CNY to make the USD/CNY exchange rate above the 7.0 threshold. However, the People's Bank of China (PBOC) has denied this. In your opinion, was the currency depreciation of China a direct response to the US rate cut, or was it just a way for China to project itself?

Dr. NGUYEN TRI HIEU: - It is not the first time that China has depreciated its currency. Twenty years ago, during the time of President Bush, China had depreciated the CNY to support its exports. In 2016, speaking at an election rally, President Trump said that China has been manipulating its currency to get more benefit from bilateral trade with the US. Actually, China has maintained a low CNY for many years to support its exports.

After the failed negotiations last week, USA announced that it will impose 10% tax rate on another USD 300bn worth of Chinese products effective from 1 September. Immediately, USD/CNY exchange rate climbed to 7. In 2008, China had depreciated the CNY to make the exchange rate above 7. The USD/CNY exchange rate has recovered since then, and now one more time, it has climbed above 7.

The PBOC said that it has not depreciated its currency, or has used it as a tool to respond to the trade war with US. However, in practice, CNY has depreciated strongly. Over the last three months, CNY has depreciated by 4%.

US has termed China as a currency manipulating country. US may have another stronger tool like increasing the tariff on Chinese products. US may also influence the IMF to do something about China. There is a probability that IMF may exclude CNY from its currency basket.

US is a key member of IMF, hence it may take a tough stand and influence the IMF to exclude CNY from the currency basket.
Some years ago, IMF had added CNY to its currency basket. US is the key member of IMF, hence, it may use this tough tool to influence IMF to exclude CNY from this currency basket. Previously, there were 4 strong currencies in the basket and CNY had been recently considered the 5th one.

Being added to the currency basket of IMF has helped improve the image of CNY. Now if US finds a way to influence IMF to exclude CNY from its currency basket, the image of CNY will be strongly impacted. No one talks about this, but I do not exclude this scenario.

China seems weaker in this war

- Some experts say that by this currency depreciation, China may create a risk for itself. What do you think about this?

- Currency depreciation supports exports, but it impacts China’s investments. For example, some investors who are doing business in China may withdraw their investments from China after the depreciation of the CNY. When investing in China, investor earnings are calculated in CNY, but when withdrawing, their capital is calculated in foreign currency.

- Do you think that the US-China trade war has now become a currency war?

- Currently, it has not. However, there are some signs that a currency war may occur. China depreciated its currency while US cut its rate and eased its monetary policy with the target to support exports.

Many countries have objectively or subjectively depreciated their currencies to support their exports. If this situation lasts longer, and every country follows the same way to depreciate their currency, a currency war is likely to happen.

To conclude, as of now it is not a currency war.

Vietnam should be careful and well prepared

- In practice, the depreciation of CNY has impacted the value of VND. Furthermore, Vietnam is currently on the watch list of US for currency manipulation. How should Vietnam respond?

- Vietnam is not on the list of currency manipulation countries but on the watch list for currency manipulation. There are two rounds to consider a country which manipulates its currency. Firstly, a country which has bilateral trade with US above USD 40bn will be notified by US. Secondly, US will consider three things, the trade surplus (above USD 20bn), the ratio of trade surplus to GDP (above 2%) and the purchasing of foreign currency in six consecutive months.

However, Vietnam is linked strongly with China in terms of international trade, hence, the exchange rate adjustment is also impacted by this relationship, not just to explore the benefit from exports to US. I do not think Vietnam will fall into the currency manipulation list. Vietnam will not fall in the list of currency manipulation countries if it adjusts the exchange rate at a reasonable magnitude, such as 3% for the whole year of 2019.

So far, USD/VND exchange rate has depreciated 0.3% YTD. From now till the end of 2019, this exchange rate may depreciate 2%. However, 3% is no problem if it is necessary.

- The interest rate cut of FED has impacted monetary policies of other central banks in the world. They have also eased their policies and cut interest rates. How will this trend impact Vietnam’s interest rate?

- Many countries cut their interest rates, meaning eased their monetary policies. In Vietnam, the government has also directed a reduced interest rate and called commercial banks to cut their lending rates. However, is it possible when the commercial banks currently have to pay very high deposit rates? The higher deposit rate will make higher lending interest rate after including 3% of operating costs and margin. Although, some banks have cut their lending interest rate for some sectors but it is just for some specific cases, not the whole market.

- Amidst the complicated movement of the world as well as the escalation of the US-China trade war, which way should Vietnam’s monetary policy go?

- In my opinion, from now till the end of the year, the government will continue using the flexible monetary policy which was set at the beginning of the year. Recently, the State Bank of Vietnam has been successful in using the reference rate as a tool to adjust the market. The State Bank now also has about USD 68bn in terms of foreign reserves. These two factors have helped stabilize the exchange rate since beginning of 2019.

Vietnam will not fall into the list of currency manipulation countries even if it depreciates VND by 3%.
I think the State Bank should not depreciate USD/VND exchange rate now. It should carefully watch the movement of the market to have a suitable response. Especially, Vietnam should watch carefully the bilateral trade with China, in particular the imports from China.

It is easy to have the official data of the trade with China. However, it is hard to have the unofficial data. Vietnam is bordered with China in the North and there are many products which are exported from China to Vietnam through unofficial ways. Hence, besides carefully updating the official trade data with China, the authorities should also strictly watch the unofficial trade activities in making suitable policies.

The government and the State Bank should maintain continuous update on global politics. In the domestic market, enterprises and other economic units need transparent information on exchange rate, foreign reserves and monetary policies to know what they should do and to support the implementation of government monetary policies and fiscal policies.

If the information is not transparent and not updated, the companies and other economic units will be unable to respond suitably with the changes in the world. Not only that, but the changes are happening fast, and are impacting the economy very strongly and widely.

- Thank you very much.

Yen Lam (Interviewer)

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