Vietnam's Economic Malaise and Lessons for China, Part IIRecent economic turbulences in Vietnam – high inflation, tumbling stock markets, a depreciating currency and more – have not just attracted worldwide attention in their own right. Due to its proximity to China and its similarly "socialist" market economy, Chinese have been keenly following the developments in Vietnam.

The EO sent two reporters to Hanoi and Ho Chi Minh City in early June to investigate the situation on the ground, and consulted experts on the economies of both countries.

The findings, which appeared on the EO's Chinese print edition dated June 16, have been rewritten and updated here in the form of a two-part series.

Part two of this special focus on the frail Vietnamese economy surveys economists' opinions on lessons learned for China, what it could do to help, and how Chinese enterprises are faring in Vietnam.

Experts' Opinion: Lessons Learned for China

Liu Junsheng, research fellow of Institute of Asia-Pacific Studies, Chinese Academy of Social Sciences:
Vietnam has taken big steps in freeing the market. Since it entered the World Trade Organization last year, Vietnam has liberated its market to fulfill its commitment of opening-up, attract foreign capital and keep up rapid economic growth. But too much has been freed.

On the other hand, China has adopted gradual reforms with more macro-controls. China has realized and reacted to overheated economy and inflation since 2006.

China is also different from Vietnam in the scale and level of development, fiscal deficit or surplus, and foreign exchange reserves. There may be lessons for China to learn, but China will not necessarily have the same problem. 

We can draw lessons from Vietnam regarding the exchange rate, for instance. We should make clear the causes for inflation. Is it because of an overheated economy, or too much foreign exchange and excessive liquidity? Or is it imported inflation? We must find out which factor is more influential here.

If it's a result of a poor exchange rate system purely, then there can be some adjustment in it. However, the exchange rate may not be the only cause. There might be a high risk to rashly alter or limit the exchange rate when the US is in a sub-prime mortgage crisis and the global economy is volatile.

Guo Tianyong, Director of China Banking Institute:
In my opinion, one of the most important lessons learned from the Vietnamese case concerns the flow of international capital. We must pay extra attention to the issue of hot money, and we must have an effective exchange rate regime.

As we all remembered, some time ago, there were lots of calls for the Chinese currency to have a one-off huge appreciation. However, several institutes have performed research and surveys on the impacts of an appreciating yuan. First, many enterprises have indeed suffered and some have sloed shop due to a stronger yuan.

Second is the issue of hot money, or what some have called unexplainable capital. China's foreign reserves increased some 230 billion dollar between January and April this year, yet FDI and trade surplus only amounted to about 70 or 80 billion dollars. What made up the rest of the inflow? There are differing opinions on this, and some say the real volume of inflow capital is not that high; but a report by Deutsche Bank estimated that up to 370 billion dollars of hot money had entered China's market.

If the yuan was to appreciate significantly, with so much hot money around, it would greatly reduce the cost of returns for these hot money investments. What would happen if the yuan appreciated a lot? Both the 1997/98 Asian financial crisis and the current economic turbulences in Vietnam have taken place at a time when the US economy has declined and was heading for a recovery. When the US dollar is getting strong again, there is a hidden risk of a big outflow of capital. If the US dollar regained, would China also experience large-scale capital outflow? This is our worry. Thus, I believe we should maintain pro-active and careful policies.   

Gu Yuanyang, Institute of World Economics and Politics, Chinese Academy of Social Sciences:
If the Chinese government really wants to help, I think its best to think of ways to reduce its trade surplus with Vietnam. For the year 2007, of the 12.4-billion-dollars Vietnamese trade deficit, China made up about one-third or 4 billion. China may consider importing more from Vietnam but unfortunately, not many commodities produced in Vietnam are required by China. Another alternative is for Chinese companies to set up processing plants in Vietnam to produce spare parts needed by the latter, and cut their dependency on imports.

In addition, when the secretary-general of Communist Party of Vietnam Central Committee visited China in late-May, China has pledged 500 million dollars worth of Official Development Assistance (ODA) to Vietnam.

If external intervention is truly needed by Vietnam later, I believe the best way is to go through a supportive framework of financial cooperation under the ASEAN 10+3 (including China, Korea and Japan) group. The economic foundation of the region is stronger compared to 10 years ago and better prepared, especially when the grouping has agreed to set up a foreign exchange pool worth 80 billion dollar, which could be helpful in time of needs.

Ground Situation: Chinese Enterprises Surviving Vietnam
High inflation and tight macro economy controls in Vietnam have squeezed the survival space of Chinese enterprises there.

Faced with soaring prices, a depreciating Vietnamese dong, a shortage of dollars, and les projects for bidding, Chinese businessman Kong Xiongfei said he was experiencing the most difficult time since arriving in Vietnam seven years ago.

Kong is presently the deputy chief of China National Heavy Machinery Corporation's (CNHMC) regional office in Vietnam. The company trades heavy machinery and equipment from China to Vietnam, and takes part in the latter's infrastructure projects through tender processes. 

For the first half of this year, Kong said the company only had three projects in hand, compared to a total of 15 last year.

"We used to receive lots of tender invitations, and we used to be choosy, only go for the best projects. But this year, the number of projects for open tender shrunk suddenly and drastically," he said when interviewed in mid-June.

In the same tight spot was China State Construction Engineering Corporation (CSCEC), which also deals with infrastructure projects. Its Vietnamese office chief representative Wang Guijun said the company suffered from contracts signed several years ago in dong, as the currency has depreciated in recent months. 

In addition, price spikes of construction material, such as cement and steel, exerted more pressure on Chinese enterprises in Vietnam.

Fearing losses, these companies upped their price quotes when tendering for new project, but that made negotiation processes with potential clients increasingly tough.

Promptness in payment was another problem, according to Kong, he was still waiting for a sum of tens of millions of dollars supposedly due in early May. Like many foreign enterprises in Vietnam, CNHMC's dealings in Vietnam were settled in US dollars.
 
"It is not that the client is intentionally delaying payment, but because the banks lack US dollars. Liquidity of Vietnamese companies has become a matter of numbers on paper in banks' records, left with checks that cannot be cashed," Kong added.

Dollar Shortage
Strangely enough, just several months ago, the dollar was in excess supply with no takers.

Deputy financial controller Song Wen, from China Shanghai Corporation for Foreign Economic & Technological Cooperation (SFECO), has been overseeing the account for a power plant project in Vietnam.

She remembered clearly some local banks refused her request to change dollars into dong in late-January; while one agricultural bank near her project site demanded a processing fee. In addition, suppliers also refused to accept payments in US dollar.

"It was not surprising as the dollar was depreciating at that point of time," Song recalled, adding to make a payment totaling some three million dollars then, she had tapped all possible "connections and networks".

She finally managed to get the payment out after agreeing to an exchange rate far worse than the official one, and could only transfer the money in stages – approximately 20,000 dollar per week.

At that time, the dong was gaining against the dollar. It was 16,010 dong per dollar as of December 31,2007, but a month later on January 29, 2008, it became 15,800 dong per dollar.

"At that time, everyone was trying to sell dollar and change into dong, both in the black market and at state-owned banks," Song recalled.

The about-face came around March, Song recalled that was when some banks approached and offered her high monthly interest rate of 14% if she deposited in dollar. The dong also started losing value, by late-May and early-June, the rate in the black market reached some 18,500 dong per dollar.

Cheng Xuhong, chief representative of Taiwanese China Trust Commercial Bank's Hanoi office, had been receiving endless calls from concerned Taiwanese clients since news broke that Vietnam was heading for financial crisis.

He personally believed that international media had exaggerated the problems in Vietnam, but advised clients to hold back major plans and wait for the clouds to clear.

"Wait-and-see is all we can do now," said another Chinese businessman Chen Jianyuan, manager of Vietnam Motorcycle Company of Lifan Group, adding that as Vietnames have been bracing for lenaer times, sales at his company have dropped.

Translated by Ren Yujie, Zuo Maohong, Lin Li