Tuesday, 19 Feb 2019

Yuan depreciation is not a concern for Vietnam yet: experts

Updated at Wednesday, 04 Jul 2018, 22:12
The Hanoitimes - Over the last two weeks, the Chinese yuan (CNY) has lost 3% against the US dollar, and is expected to continue depreciating in the context of growing trade tensions between the US and China.
Although China is one of Vietnam's largest trading partners, experts are confident that a weakened CNY will not cause significant negative impacts on Vietnam's economy in the short term, the Thanh Nien newspaper reported. 
Illustration photo.
Illustration photo.
The purpose of currency depreciation is to boost export and shrink trade deficit, economist Vu Dinh Anh was quoted by the Thanh Nien newspaper as saying. Consequently, a weakened CNY will make Chinese exports more competitive in the global market.

"This issue is directly related to the recent trade tension between the US and China, so that Vietnam will not be affected immediately," Anh said.

Additionally, a devaluation of Chinese currency will cause CNY-denominated loans to shrink, according to Anh. At present, loans in CNY are used to pay import bills of machinery and equipment, as well as to pay for salaries of Chinese experts. “Vietnamese enterprises having loans in CNY should be delighted as the currency is devalued,” he continued.

However, in a longer term, Vietnam's export staples will be under pressure from China's increased export activities, especially textile, garment, and footwear, Anh concluded. 

Sharing Anh’s view, economist Bui Trinh said Vietnam should learn from the past and not devalue the VND when the CNY devaluates. “Vietnam should stay calm as this only benefits local enterprises having loans in CNY,” Trinh added.

With regard to concern over an increase in trade deficit with China, Trinh argued this will only happen with domestic enterprises, while foreign peers have been maintaining trade surplus for a long time. “An increase in trade deficit, therefore, would be insignificant,” Trinh said.

Meanwhile, according to Pham Xuan Hong, chairman of the Ho Chi Minh City Association of Garment - Textile - Embroidery - Knitting (AGTEK), China's textile industry growth has slowed down considerably, leaving Vietnam's textile industry largely intact. 

Potential negative impacts in long term
USD/CNY exchange rate in the last five years. Source: Bloomberg Markets.
USD/CNY exchange rate in the last five years. Source: Bloomberg Markets.
At present, Europe is Vietnam's second largest export market for textile and garment products, after the US. The yuan depreciation may in a longer term change that status, due to a high volume of Chinese products penetrating into the European market, Hong added. Moreover, Vietnamese export products will be at disadvantage compared to those of China as a result of a weaker yuan.

More worryingly, China's weakened CNY will make it more profitable for Vietnamese enterprises by shifting production towards import, Hong stressed. By then, they will only focus on importing instead of investing in machinery and equipment for a higher localization rate, which is a major requirement for Vietnam's enterprises to enjoy preferential rules of origin in most free trade agreements, he concluded.
Ngoc Thuy
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