Vietnam is set to welcome a huge flow of investment from Hong Kong in the light of implementation of a free trade agreement between this economy and the ASEAN bloc.
The ASEAN-Hong Kong Free Trade Agreement is expected to help Vietnam attract more Hong Kong investors
On June 11, the ASEAN-Hong Kong Free Trade Agreement (AHKFTA), signed by Hong Kong and 10 Southeast Asian countries, officially came into force for Vietnam, Laos, Thailand, Myanmar, and Singapore. Under the agreement, the economies will reap benefits from reducing goods tariffs, opening a free flow of services, and widening investments within and across borders.
Similar to other nations’ commitments of cutting tariffs, Vietnam will eliminate customs duties on about 75 per cent of tariff lines within 10 years and reduce customs duties of about another 10 per cent of tariff lines within 14 years.
“The AHKFTA is another peg in securing the trade liberalisation tent and it is a big win for the ASEAN, and particularly Vietnam,” said Pham Hong Hai, CEO of HSBC Vietnam. “With no end to the trade tensions, Hong Kong businesses are looking for wider investment opportunities and the FTA signals Southeast Asia as a fertile ground.”
Hai also said that the bilateral trade and investment co-operation between Vietnam and Hong Kong has grown steadily over the years, and the FTA coming into force promises to open the door to more co-operation opportunities for both sides.
Vietnam is seen as one of Hong Kong investors’ most favourite destinations due to the country’s geopolitical advantages. In the first five months of 2019, Hong Kong emerged as the leading foreign investor in Vietnam with $5.08 billion in total registered investment capital.
Discussing the issue with VIR, Michael Chiu, chairman of the Hong Kong Business Association Vietnam (HKBAV) said that Vietnam has many attractions for international financiers. Those from Hong Kong have diversified over time from the earliest textile and apparel industries to the ever-strong real estate sector.
As long as 20 years ago, diversified conglomerate Sun Wah Group entered the real estate market with property firm Alpha King being the newest kid on the block. That is not to say Hong Kong investors have walked away from manufacturing altogether, with garment-maker Regent Garment Co. in April announcing their $39 million expansion.
“These are not mere relocations, they are new investments and expansions while diversifying risk by having multiple production hubs, very much the ‘China plus one’ strategy,” Chiu said. “More are considering these moves with the recent dispute between United States and China still ongoing.”
Southeast Asian competition
According to Chiu, Hong Kong has always been in the top six of foreign investors to Vietnam for the past five to 10 years. This economy has long been a gateway for outward investment from China as well as being a regional hub for many international investment funds, making Hong Kong a strong foreign investor in many markets, not only in Vietnam.
He further noted that with much attention on Vietnam at the moment, it is only reasonable to predict that more investments via or from Hong Kong will continue to favour Vietnam, citing the increased number of trade delegations the HKBAV has seen since the beginning of the year.
“We do expect favourable decisions to continue the Hong Kong investment trends in Vietnam,” Chiu added. “We are optimistic at least for the next 12 to 24 months for Vietnam to continue to be top priority for Hong Kong investors, being privy to much of the due diligence being carried out by potential funders at present.”
According to Jonathan Choi, chairman of Sunwah Group, more Hong Kong funders are exploring the possibility of coming to ASEAN countries. Vietnam is emerging as a good place for them as the country stands to gain benefits from a wide range of FTAs including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the AHKFTA.
“Vietnam is one of the more politically stable countries in the region,” Choi said. Thus, he stressed there is a good chance for Hong Kong companies to invest in Vietnam and tap into the domestic market. Despite the positive outlook, the HKBAV chairman also said that it is really too early to tell what impact the AHKFTA will have on the foreign direct investment (FDI) decisions from Hong Kong to Vietnam, with many still working to understand the agreement thoroughly. Business decisions are made not based on one element but a series of complex elements based on many factors.
In fact, Vietnam has to enter into competition with Asian countries, which are also promising and have similar features to the country, according to economist Nguyen Tri Hieu.
Hieu told VIR that Hong Kong also already has many good relationships with surrounding countries like South Korea, Japan, and Malaysia, among others. Over the past few years, a significant number of foreign investors in China have steadily relocated their business to Southeast Asia, particularly to Malaysia. “Vietnam also has opportunities to lure Hong Kong investors but it is not plain sailing because other countries are constantly joining the game,” Hieu said.
Similarly, assessing the AHKFTA, Hieu said that this is a great opportunity for ASEAN countries to co-operate with Hong Kong investors. However, with Vietnam, it is not really a breakthrough because the nation previously signed a bilateral agreement with Hong Kong similar to the AHKFTA. In addition, benefits from the new agreement are separated for ASEAN countries, so Vietnam needs to step up to take advantage of the newer agreement.
Hieu said that despite being one of the most favoured destinations for investors, Vietnam still has limitations on quality of labourers as well as business and investment procedures. Therefore, removing obstructions should be carried out as soon as possible to raise the country’s competiveness.
According to the latest report from the Vietnam Logistics Association, local logistics costs are about 16-17 per cent of GDP, higher than Thailand’s 15 per cent and Singapore’s 8.5 per cent. In addition, transportation costs account for 40-60 per cent in the logistics industry. “With the high fees for transportation, investors may be self-conscious about entering Vietnam,” Hieu added. “Once transportation infrastructures are favourable, overseas investors will absolutely pour capital into the country.”
Regarding labour quality, Hieu pointed out that the Philippines, Thailand, and Malaysia have more advantage in English language proficiency than Vietnam because the countries were previously British colonies. Meanwhile, Hong Kong was also a British colony with similar language skills, so this economy’s investors may often prefer options other than Vietnam. As a result, resolving the language issue will help Vietnam enhance competiveness in the region. VIR
Foreign investors pour in $14.59 bn in first four months of the year, the Ministry of Planning and Investment reports.