Re China: Heard in the Rex Hotel coffee lounge

[A worldly Vietnamese tycoon and his underling sit drinking their coffee]


Wow, China’s going down the plug hole and seems to be dragging the rest of the world with it. Is its influence really that great?

Well, China as of last year is the world’s largest economy on an underlying “purchasing power parity” basis, and a huge trading nation too. Its influence is therefore large on every country, including Vietnam. If China experiences some kind of economic crisis or recession, the effect on Vietnam and most everybody else will be negative.

But wait – I haven’t heard about an actual Chinese recession or crisis…is that what’s happening?

We’re operating in the dark, here…we don’t know…and that’s a big part of the problem. Crises – as we all know from recent experience – can sneak up on you even in open societies with good-quality information flow. But in China’s case, we can’t trust the officially-supplied data, and there isn’t so much of the unofficial stuff. This starts right from the top piece of data everybody always wants to know and talk about: GDP growth. The Chinese government says it’s at 6.5% or 7%, but plenty of intelligent observers, piecing together bits of bottom-up data, think it’s really more like 2-4%. That’s a big difference.

But that’s not a recession…

Right, recession seems unlikely. But economies are dynamic beasts with many rapidly moving feedback loops that can quickly build like a snowball rolling down a hill, and of crucial importance in such scenarios is what happens to confidence. And confidence might be all the more vulnerable if the official data looks dodgy, or if the state’s leaders look inept.

Wait a minute…inept leaders? People often say that in the bars of Saigon (even in Hanoi too) about our leaders, but China’s leaders are revered worldwide as being smart and very competent.

That’s what’s suddenly changed in the last six months. The hopeless communication by the central bank over the new renminbi regime, the stop-start signals on fiscal reflationary measures, and most of all the laughable interventions in the stock market – from the “national team” with its “target” index level to circuit breakers and bans on selling. These have suddenly made Beijing’s economic technocrats look like flailing fools. Even our Vietnamese honchos have the wisdom not to try to “manage” the stock market !

Okay, so let’s say China really does collapse to zero growth for a year or two. How’s it going to affect all of us in Vietnam?

Let’s see here…[pause, puts down cafe sua da to count fingers on right hand]…in five ways. One, on our own GDP growth indirectly, via the reverberations globally from slowing China. Two, our growth directly: 8% of our GDP is exports to China, probably ones that would hold up pretty well, mind, but still there could be some softness here. Three, if the yuan falls further, so will the dong – maybe by less, but still at least most of the way down. At heart we’re a substitute for China in export manufacturing, so our relative costs matter a lot. Four, the “cost of capital” – as those tedious CFA analysts I have to meet all the time call it – will rise in emerging markets including Vietnam – that’s both for equity and debt. A higher cost of capital means slower investing and a negative effect on growth. Five, our stock market will find it that much harder to go up – I’m assuming here that the Chinese ones are pretty bad under this scenario. This is bad in itself but also carries with it a negative feedback loop on sentiment – and my wealth !

So if China’s screwed, we’re screwed too ! Shall we switch to whisky, boss ? – this is getting depressing ! And those Chinese dictators, facing a mess at home, will probably be all the more aggressive in the East Sea, to giddy their pissed off populace along !

Well, on the last point, that’s an astute observation…but thankfully the quiet whispers are that the American camp will win in our coming party congress, which means we’re building a pretty good international bulwark against an aggressive China. Sure, we’ve long ago lost both the Paracels and the Spratlys – but it’s about time we educate our people to grow up and forget about those stupid rocks anyway !

All right, so – forgetting about the rocks and taking the important stuff – are we screwed ?

Cheer up, boy, it’s not that bad. You see, life is a relative game, and tycoons, pension funds, and everybody else all have to put their money somewhere. And this is where we in Vietnam shine out like a beacon, compared to most other places. Sorry for the coming speech, try to pay attention. We shine because:-

First, unlike most of our Asian peers, we are a massive net importer from China – our imports from there equal a whopping 25% of our GDP, versus only the 8% we export to them. If China’s stressed, they’ll be very keen to keep selling that stuff to us, and maybe more cheaply too. And as I said before, the stuff we export to them is mostly soft commodities with low income elasticity of demand.

Second, we have been experiencing eight straight years of high FDI – including during the western financial crisis in 2008-09 – and this trend seems to be a very robust one. USD14.5bn in the year just gone, on a c. USD200bn economy, is a lot ! Vietnam has kept its status as the key “China + 1” destination, and our policy makers have done a good job of being hospitable to this constituent. We are still coming from a low base: for example, Chinese textile exports still dwarf ours by many times. Also, we are more a seller of final products to end markets in the developed world, than we are to Chinese consumers. And all these free trade agreements we’ve signed, whilst not necessarily having suddenly visible impact, are of profound long term importance for keeping our FDI boom intact for many years to come.

Third, overseas Vietnamese remittances, at USD12.5bn last year, have – like FDI – been both big and reliably growing. This is a great source of strength for Vietnam and makes for a contrasting narrative with China, where the talk is of accelerating capital flight – exacerbated when you arrest too many of your businessmen !

Fourth, Vietnam’s overall low economic base. Put simply, as one of the economies bringing up the rear of the Asian train, Vietnam has less to lose.

Finally, fifth, back to that old word “confidence”. If China has some struggles, isn’t it more likely to put a spring in our Vietnamese step than it is to depress us? Hey, it’s 6:30pm….shall we move on to a cheerful whisky to celebrate our luck in being in the right place at the right time ?

Em Oi !


Mekong Man