Suitable macro policies amidst US-China trade war

Vietnam needs a suitable macro policy to utilize the opportunities and advantages of the US-China trade war, as well as overcome the challenges it brings.  The country also needs to find a credible solution to origin of products to avoid risks.

We need to choose FDI inflows carefully, especially in the context of the US-China trade war (illustrative photo).

We need to choose FDI inflows carefully, especially in the context of the US-China trade war (illustrative photo).

SGGP Investment & Finance had a discussion with Dr. Tran Du Lich, member of National Financial and Monetary Policy Advisory Council, and Dr. Nguyen Xuan Thanh, Director of Fulbright University, Vietnam, to further clarify these issues.

JOURNALIST: - The trade war has been escalating for over last 15 months with many sanctions and penalties, as well as negotiations and international meetings. It seems that the trade war will continue for a long time, so in your opinion, how does it impact Vietnam’s macro issues?

Dr. TRAN DU LICH: - From the outside the US-China trade war appears to be about tax and tariffs and appropriate responses. However, the hidden fight is actually about technologies and digital economic issues. Where is Vietnam on the map of opportunities or threats?

Over the last quarter decade, Vietnam has opened its economy internally and externally. For internal issues, Vietnam has been making legal, legislative and economic mechanisms more free. For external opening, Vietnam has joined many free-trade agreements.

Vietnam had Foreign Investment Law in 1988 and Business Law in 1991. Vietnam has changed significantly in three areas of international trade, investment and national credit.

In regards to international trade, before joining WTO, Vietnam exports were only USD 50bn, but were nearly USD 245bn by 2018.

“Vietnam has been successful in stabilizing the VND and gradually mitigate the impact of movement of gold and foreign currencies on value of VND. Hence, any action that violates this process is treated as a failed policy”, said Tran Du Lich.
However, attracting foreign investments has created a problem of imbalance in different economic sectors. FDI companies are current leaders of the economy and Vietnam is expected to receive another flow of FDI investments as a result of the ongoing US-China trade war.

Vietnam now cares more about the industries that attract foreign investments and the impact of this capital flow on the economy, rather than setting a targeted number for FDI registrations annually. Vietnam currently focuses much more on the quality of funds which are moving from China to Vietnam. According to the government, Vietnam needs a filter to screen the quality of FDI investments pouring in.

In the credit area, Vietnam has faced several problems, such as maturity of sovereign mid and long term loans or ODA loans, especially loans related to some un-bid projects.

This means that throughout the process of opening the economy, Vietnam has faced many challenges and issues, whether there has been a US-China trade war or not. We agree that under the current complicated situation, the above three issues are being considered more significant.

It is worrisome that some Vietnamese companies have imported products from China and labeled these products as made in Vietnam to evade US tax. Such actions will impact the whole economy. Vietnam should not scarify the long term future for short term benefit. That is the key problem that we need to focus on now.

Furthermore, if the Chinese government continues to depreciate its currency, how will it impact Vietnam currency? This is also another issue that needs to be resolved given the fact that Vietnam mainly exports to US while largely imports from China.

- The action to depreciate CNY vs USD has created pressure on USD/VND exchange rate. However, FED has stopped increasing interest rate and is even expected to cut the Fed Fund Rate this year. Will it help reduce the pressure on the value of VND?

Dr. NGUYEN XUAN THANH: - In 2018, when the economy grew strongly, FED had hiked interest rate significantly and planned to continue raising the rate in 2019. However, this year, the economy growth has been decelerating and FED has delivered the signal to not increase the interest rate in 2019. Furthermore, in front of the pressure of US-China trade war escalation, FED is considering to cut the rate.

According to Nguyen Xuan Thanh, Vietnam has been importing huge amounts of products which have been exported directly from China to US. Is China using Vietnam as a shortcut or transit to export to US?
In the last meeting, FED kept the rate unchanged. However, there was one vote to cut the rate vs nine votes of keeping rate unchanged. That is the reason why market expects FED to cut the rate this year. Following FED, the other central banks, especially central banks of developing and emerging countries have also considered to keep or cut the interest rates.

Last year, the US-China trade war created pressure on the exchange rates, causing high volatility in the stock market, the depreciation of CNY and other Asian currencies. At the same time, the increase of FED Fund Rate was the other reason for the strengthening of the USD vs other currencies.

This year, the situation is different. Although the market continues to expect CNY to be depreciated, it also forecasts FED to cut the rate. This mixed expectation helps reduce the pressure on other currencies compared to USD.

Last year, CNY depreciated 9% and recovered a little bit later. This year, CNY depreciated 2.82% YTD. Since last week, after the announcement of FED to keep the interest rate unchanged, USD has dropped vs other currencies while CNY increased 0.4%.

In May, when CNY depreciated, VND depreciated 0.46%. Similarly, recently CNY appreciated, VND also appreciated. In my opinion, the mixed impact of US-China trade war and the easing of US monetary policy helped mitigate the pressure on the exchange rate of other Asian currencies, including the Vietnam dong.

- To support exports, China has depreciated its currency several times. However, Vietnam does not have this policy, so how does Vietnam support its exports?

Dr. TRAN DU LICH: - China has its own limit for depreciating its currency as CNY is the base for economic stability. For Vietnam, I suggest the other way to support exports, not VND depreciation.

Currently, the national debts that are nominated in USD are huge. Any 5-7% movement in USD/VND exchange rate will impact significantly the national debt. Furthermore, Vietnam mostly imports materials for further processing; the increase in USD/VND rate will push up the input cost. Hence, we should find other solutions rather than depreciate our currency.

We need to find a balance in our macro policies as Vietnam exports mostly to US and imports mainly from China.
The USD/VND is expected to depreciate 2% this year. The regulated band of the exchange rate helps create flexibility for the movement of currency. The key issue is to resolve the relationship between exchange rate and interest rate. We should reduce the interest rate to support export activities in linking with other supporting policies for export companies to cut the cost and improve competitiveness.

- How is Vietnam impacted by the escalation of US-China trade war in terms of international trade?

Dr. NGUYEN XUAN THANH: -Through the export and import data of the Custom Department in first five months, we see some changes.

Firstly, the export value of Vietnam to China dropped 1.5% YoY due to impact of the decelerated growth of China’s economy. The slowdown in export from Vietnam to China influenced the export growth of the whole country in first five months. The exports in 2019 are expected to not to be as strong as in 2017 and 2018 and not be the key driver for economic growth.

Secondly, while the exports from Vietnam to US grew strongly, the imports of Vietnam from China also surged 10.8% YoY. The main products that Vietnam imported from China were electronic devices with total import value of USD 5bn in 5M/2019, an increase of 81%. These products were previously exported directly from China to US, but are now exported to Vietnam. In the same period, the export of electronic devices from Vietnam to US also surged 70% YoY.

The other products that Vietnam imported a lot from China were mechanical tools and machines. The export of these products from Vietnam to US also rocketed 30-40% YoY in 5M/2019.

China does not have strong exports to the US, hence, it tries to export products to other countries such as Vietnam.
The third product range which was imported significantly from China is furniture. The export of this product to US also grew at the same rate.

Does this mean that China is using other countries to export their products to US?

- The above situation has created a dubious situation in determining the origin of a product. What is the solution for this issue?

Dr. TRAN DU LICH: - To avoid dubious labeling of origin of products imported from China, the authorities need to control and manage these activities strictly. If this situation continues, the US may impose tax on Vietnamese products. This will impact other Vietnamese domestic companies. Note that, US requires its authorities to monitor this issue carefully.

To completely resolve this issue, we need the support of business associations in different sectors as these associations understand the businesses the most. The business associations should build a common voice to internally control and manage their activities to protect the interests of all members. This is a key issue to resolve and protect exports as well as the domestic manufacturing industry.

- Thank you very much.

Do Linh (Interviewer)

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