The depreciation of the Chinese yuan against the dollar has raised concerns that Vietnam’s goods will become less competitive in comparison with Chinese goods if Vietnam does not devalue its currency.
Yuan depreciates
According to Vietnamnet, since mid-April, the yuan has depreciated sharply as a result of the withdrawal of foreign capital from emerging markets and the escalation of the US-China trade war.
China has become a net outward investor over the last four years. The sharp depreciation of the yuan will not bring benefits to China’s outward investments.
Meanwhile, since late 2016, the yuan has been added to the basket of currencies to estimate SDR, an international reserve asset created by the IMF. The Chinese government will consider thoroughly when intervening the exchange rate.
China’s foreign debts have been increasing steadily since 2015. Its foreign debts reached $1.214 trillion, or 13 percent of China’s GDP by the end of the first quarter. Though this is not a very high figure, the sharp depreciation of the yuan will affect China’s debt payment capability.
BVSC believes that the possibility of the Chinese government devaluing the yuan sharply is not high. Nevertheless, it says that investors’ excessive worries and market factors may still depreciate yuan further.
| In order to neutralize the risks from bearing higher taxes on exports to the US and ensure the competitiveness of Chinese goods in the world market, the yuan needs to depreciate by 2.7 percent. As such, the 8 percent depreciation since April is too much. |
In order to neutralize the risks from bearing higher taxes on exports to the US and ensure the competitiveness of Chinese goods in the world market, the yuan needs to depreciate by 2.7 percent. As such, the 8 percent depreciation since April is too much.
BVSC: Vietnam dong to depreciate by 3 percent
After selling dollars to stabilize the market on July 3, SBV on July 22 raised the dollar selling price by VND223, or 0.9 percent.
“This is a sign showing that SBV decided to stop the stabilization of the market by selling dollars at low prices. With the move, the exchange rate truly reflects the real situation of the market,” BVSC commented.
BVSC believes that for foreign invested enterprises, the appreciation or depreciation of the dollar will not be a big problem for them. The dong appreciation will mostly affect the domestic economic sector, especially the exports of farm, forestry and seafood produce.
The yuan 8 percent depreciation against the dollar has caused the Vietnam dong to appreciate by 5 percent against the yuan. This has weakened Vietnam’s farm, forestry and seafood exports to the Chinese market.
The sharp depreciation of the dong will cause high inflation and reduce confidence in the dong. However, if the yuan continues depreciating against the dollar, Vietnam will need to act flexibly in adjusting the forex.
“We think that the Vietnam dong will lose 3 percent of its value in the year 2018,” BVSC said.