VietNamNet Bridge - According to Bloomberg, the amount of capital out of China in 2015 was about $1,000 billion, compared to only $134.3 billion in 2014. However, there is no sign that Vietnam has attracted some of that capital.

According to the Central Institute for Economic Management’s (CIEM) macroeconomic report in the first quarter 2016, the deceleration of the Chinese economy may affect neighboring countries, including Vietnam.

The impact on Vietnam may come from different channels: directly affecting Vietnam’s growth due to the fall of China’s import of goods; the impact of the measures to stimulate growth that China is using and will use to restore growth; and the indirect effects from the global environment in general as other economies are also affected.

The Chinese government has implemented a series of measures to prevent the decrease of growth. The important solutions consist of the devaluation of the yuan (CNY) and interest rate cut.

Until the end of 2015, after four time of devaluation, the CNY devalued about 4.6%. The devaluation of the CNY targets to strengthen the internationalization of the CNY and other goals.

According to CIEM, the impact of the adjustment of China's exchange rate has made quite clear impact on Vietnam. The State Bank of Vietnam had to loosen the trading band to +/- 2% in order to restore the competitiveness of Vietnam's goods.

However the bilateral trade between Vietnam and China in 2015 still showed that China is still the market that Vietnam depends the most in the trade balance, as the trade deficit with China is up to $32.3 billion in the year, up 12.5% over 2014 and many times higher than the trade deficit of the whole economy ($3.2 billion dollars).

"Some recent studies also showed that if Vietnam devalues the Vietnam Dong to promote exports, it will lead to the increase of imports from China. This conclusion also explains why for many years, Vietnam strongly devalued the VND, while the value of the CNY increased against the US dollar, but Vietnam's trade deficit with China has increased sharply. The problem is not the exchange rate but the economic structure, especially the structure of export-oriented investment," the CIEM report noted.

Also, according to the CIEM, economic decline and the devaluation of the CNY can also lead to the reduction of investment flow into Vietnam due to the increase of raw material prices. The majority of raw materials used by foreign-invested companies in Vietnam are imported from China.

The FDI flows into Vietnam in 2015 rose by 10% ($24.1 billion of registered capital), largely attributed to the expectations of the trade agreements that Vietnam has signed recently; however, the increase of registered capital was not much higher than at the time Vietnam just joined the WTO.

On the other hand, due to the economic downturn, the capital flows out of China tends to increase. According to Bloomberg, the amount of capital running out of China in 2015 was $1,000 billion. However, there is no sign that Vietnam has attracted some of it.

Besides, the Chinese government has strongly slashed interest rates. China has cut interest rates for six times, accordingly, the nominal interest rate fell from 5.6% at the end of 2014 to 4.35% in January 2016, while deposit rates falling from 2.75% to 1.5%.

CIEM report said that China’s cut of interest rates in the short term can make negative effects on Vietnamese enterprises. When interest rates fall, the Chinese enterprises will increase production.  Chinese goods will be abundant and the price will be very competitive. Thus, it will be more difficult for Vietnamese enterprises to export to China. Meanwhile, export of Chinese goods to Vietnam will be easier.

However, if reduction of interest rates helps stop the decline of China's growth, then in the long term Vietnam can still benefit from China's overall growth.

Nam Nguyen