VietNamNet Bridge – HSBC Bank’s latest Vietnam macro-economic report says the nation will feel limited impact from the East Sea tensions with China.

Vietnam Coast Guard officers are seen on duty near the area within Vietnam's exclusive economic zone and continental shelf in the East Sea where China illegally planted its Haiyang Shiyou-981 oil rig. HSBC Bank’s latest Vietnam macro-economic report says the nation will feel limited impact from the East Sea tensions with China.

The bank has released the report just more than one month after China illegally deployed a giant oil rig and a large number of escort ships well within Vietnamese waters in the East Sea.

Taking a close look at Vietnam’s exposure to China to analyze the short- to medium-term impacts of recent developments, HSBC said most of the foreign direct investment (FDI) stocks currently in Vietnam are owned by Japanese, Korean, American and Taiwanese companies. Though the registered FDI from China into Vietnam has risen in recent years, its total remains small.

Therefore, the economic relationship between China and Vietnam is primarily a supply chain rather than investment links. Most of the goods imported from China are inputs for apparel production such as fabrics, yarn, and machinery but consumption-oriented imports also play a large role.

However, HSBC said that the sector that will be hurt by the East Sea tensions was tourism, albeit temporarily. As elsewhere, Chinese tourists have increased their share of total arrivals due to rising income, and Chinese arrivals in Vietnam in the year to May had grown over 26%.

“We expect some slowdown in June but will likely normalize in July,” the bank said in the report.

In general, core investors in Vietnam will stay put as FDI tends to be sticky. While the long-term impact is still uncertain, Vietnamese manufacturers will likely try to increase localized inputs as well as improve their supply chain management to lessen dependence on China for inputs and meet Trans-Pacific Partnership (TPP) requirements.

HSBC said it was still too early to draw conclusions, so the long-term impact of the tensions was best analyzed through the trade relationship between the two countries.

Vietnam’s trade relationship with China is stronger from the import side, as many inputs of Vietnamese production come from China. This is due to the fact that Vietnam primarily uses its cheap labor and fertile land to compete on the international market.

Vietnamese policy makers are concerned about the limited localization of inputs but they have had few concrete measures implemented. The recent events, if anything, will likely accelerate the pace of policy reforms to increase domestic capability to link to the global supply chain.

The domestic garment and textile industry aims to reach a localization rate of 60% by 2015. It remains to be seen whether it can achieve that goal.

However, this effort is necessary for Vietnam to reduce its dependence on imported inputs and meet the requirement of TPP, which requires a higher domestic content in exports.

HSBC forecast that the silver lining was perhaps the Vietnamese government would accelerate its current pace of economic reforms. The central bank has already reduced rates to facilitate domestic demand.

“Credit growth, however, expanded only 1.3% year-to-date in May. We believe lending will accelerate in the second half of 2014. The State Bank of Vietnam will likely keep the open market operations (OMO) rate steady at 5% for the rest of the year,” it predicted.

In the current context, HSBC suggested Vietnam further liberalize trade barriers externally through agreements such as the Vietnam-Korea Free Trade Agreement (FTA), Vietnam-EU FTA and TPP. In addition, Vietnam should improve logistics infrastructure, reduce the shortage of skilled labor, and increase supply chain management capability and facilitate linkages with foreign firms.

Earlier, Standard and Poor’s (S&P) and Moody’s, two of the world’s most prestigious credit rating firms, said that tensions in the East Sea and public disorder in some localities of Vietnam had not affected Vietnam’s credit ratings.

Source: SGT