VietNamNet Bridge – A proposal by the Chinese Business Association and Industrial and Commercial Bank of China (ICBC) for making payments in renminbi, or the Chinese yuan (CNY), in Viet Nam has met with opposition.

This is not the first time the proposal has been raised. Viet Nam has rejected several similar proposals earlier. — Source Photo cafef.vn

The proposal was included in a recent report by the Viet Nam Chamber of Commerce and Industry (VCCI), which had collected proposals from various businesses to be submitted to the government, a local newspaper reported.

According to the proposal, the quantum of payments to be made in renminbi in Viet Nam was huge and had risen throughout, along with the uptrend in bilateral trade. The proposal cited that at the end of 2013, payments made in renminbi in the cross-border market had grown to US$15 billion.

It was also proposed that the State Bank of Viet Nam should allow the ICBC to cooperate with Vietnamese commercial banks for the implementation of renminbi-related operations.

If the proposal to make payments in renminbi is allowed in an expanded fashion in Viet Nam and implemented by banks through official channels, the central bank can efficiently manage this source of capital, strengthen tax collection and prevent money laundering.

In addition, trade balance will not be affected as the US dollar will be simply replaced by the renminbi for making commercial payments, the proposal pointed out.

Voices against the proposal

However, experts have said that Viet Nam should be cautious about implementing the proposal.

According to Nguyen Minh Phong from the Ha Noi Socio-Economic Development Research Institute, Viet Nam's economy will be exposed to a number of risks if payments are accepted in renminbi.

Currently, the renminbi has not become fully convertible in the international market. As a result, businesses holding this currency will face risk. Phong mentioned another risk of Vietnamese businesses becoming financially dependent on China, a significant risk, given the existing conditions, since Viet Nam is already running a huge trade deficit with China.

Nguyen Duc Thanh, the director of the Viet Nam Centre for Economic and Policy Research (VEPR), said the proposal should not be accepted, especially when the government had been making efforts for the last three years to reduce dependence on the US dollar for making payments.

Pham Sy Thanh, director of the VEPR's Chinese Economic Study Programme, pointed out that direct transactions made in the renminbi in the cross-border market were technically not considered legal in Viet Nam and that the two countries had not signed any swap agreement. He added that the proposal could not be accepted on any grounds.

The Deputy Director of the State Bank of Viet Nam's southern branch, Nguyen Hoang Minh, was quoted by Vnexpress as saying that in 2011, a Chinese bank was allowed to partially make direct conversions between the renminbi and the Vietnamese dong for transactions through a legal customs declaration.

However, this operation was stopped in 2012 due to its inherent inefficiency.

Minh told the newspaper that the central bank's aim was to ensure that only Vietnamese currency is used in Viet Nam's territory.

Currently, in Viet Nam, banks and businesses are allowed to conduct payments for imports and exports in fully convertible currencies, such as the US dollar, Euro, Yen or Singapore dollar. The Renminbi is not yet fully convertible.

The former governor of the State Bank of Viet Nam, Cao Si Kiem, said the proposal, if accepted, would limit the monetary management capacity, while having a negative impact on the economy, given the current limited competitiveness of the economy, as well as its weak management capacity.

An expert also said the impact, as well as the threats posed by the proposal to the monetary security of Viet Nam, should also be taken into careful consideration.

This is not the first time the proposal has been raised. Viet Nam has rejected several similar proposals earlier.

The proposal was initially put forth as part of China's ambitious plan to internationalise the renminbi.

A survey conducted by the Bank for International Settlements in 2013 showed that the renminbi was the ninth most-actively traded currency on the global foreign exchange markets, with the daily turnover in the renminbi rising to $120 billion from $34 billion in three years.

Largest import market

China is the largest import market for Viet Nam, with an estimated import turnover of $43.7 billion in 2014, up 18.2 per cent from last year.

Viet Nam ran a trade deficit of $28.9 billion in 2014, up by 21.8 per cent.

China ranks ninth among more than 100 countries and territories that have invested in Viet Nam, with more than 1,000 existing projects having a combined registered capital of $7.94 billion.

Viet Nam has only invested in 13 projects in China, with its total registered capital pegged at $15.93 million.

VNS