Renminbi Rise And Its Implications For Vietnam
By Tran Van Tho
Some remarks on the impacts of the renminbi appreciation on Vietnam’s economy by a professor of economics
On June 19, China’s central bank announced its decision to adopt a flexible exchange rate – that is, the renminbi (RMB) will no longer be pegged to the U.S. dollar.
Gradual, continuous appreciation
The latest move is actually a more flexible version of the exchange rate adopted from July 2005 to July 2008. Since 2003 or so, in the wake of a soaring trade deficit, the U.S. has been critical of China’s exchange rate policy. In response, China increased the RMB/U.S. dollar rate by 2%, from 8.28 to 8.11, in July 2005 and allowed the exchange rate to fluctuate within a band of 0.3%, which was subsequently revised to 0.5%.
Afterward, China opted for a managed float policy, with a benchmark exchange rate fixed daily and the trading band kept at 0.5%. After three years, RMB appreciated by some 20% (about 6% per annum). The RMB/U.S. dollar rate reached 6.83 in July 2008 and stayed unchanged in view of the instability in the global economy. This policy has indubitably come under fire from the U.S., which prompted China’s latest decision.
In reality, the managed float is subject to drastic intervention, as outlined above. However, unlike in 2005-2008, the Chinese Government will take into account the final exchange rate of the previous day to determine the benchmark rate before the market opens. If this is the case, China’s trade and current account surpluses, which reached US$195.6 billion and US$284.1 billion respectively in 2009, will translate into a rapidly appreciating RMB/U.S. dollar exchange rate, up by some 3% per week and more than 10% per month.
However, China will certainly prevent a dramatic increase in the exchange rate. Even when the closing exchange rate of the previous day is taken into account, the benchmark rate for a particular day may also depend on China’s economic health and the pace at which other economic policies change.
Pressure from other countries has compelled China to push up the exchange rate, but doubt still lingers on the pace of increase. The most important factor taken into consideration will be the adaptability of Chinese exporters, which, according to recent research, can endure an annual increase of 3-4%. Dr. C. H. Kwan, a leading expert on the Chinese economy and the author of the book China as Number One, says that RMB will probably increase by 5-6% per annum over the next few years, instead of surging as the Japanese yen did at the start of the 1970s and the mid-1980s.
Impacts on Vietnam
It is vital to consider the effects of China’s forex rate revision on Vietnam, which are worthy of in-depth research.
First, in the short and medium terms, many Chinese industrial products will be less competitive and experience a drop in export. Workers’ wages will rise and may even soar, plunging labor-intensive sectors into trouble. Furthermore, China’s domestic consumption and import will leapfrog, offering Vietnam a chance to boost export, slash import and improve its trade balance with China.
However, whether this scenario comes true relies on Vietnam’s ability to bolster its productivity. Chinese firms, including foreign-invested enterprises, will boost productivity to curtail the repercussions of a dearer RMB. Vietnam also needs to exert a similar effort to cash in on this opportunity. Power shortages, lack of managerial and technical human resources, and dismal infrastructure have hampered Vietnam’s industrial production. Unless these shortcomings are immediately tackled, China’s policy changes will leave few impacts on Vietnam.
Second, as the purchasing power of the RMB increases, foreign direct investment (FDI) from China will rise. If such capital flows mainly into sectors with a low technological content, an emphasis on natural resource exploitation and adverse impacts on the environment, the surge in FDI will be a cause for concern.
Third, foreign-invested enterprises in China, especially those set up by Japanese and Taiwanese firms, will probably relocate many plants to other countries to deal with higher exchange rates and rising wages in China. However, many industries, especially those relating to machinery such as auto, printer or computer manufacturing, have established supply networks in such industrial complexes as those in Huanan and will be reluctant to set up factories elsewhere.
For instance, the directors of many Japanese-invested enterprises in Guangzhou said in March, when wages started to climb rapidly, that they would continue to do business in China and focus on enhancing technology and productivity. Plants which are relocated to Vietnam or countries located south of China are therefore likely to specialize in labor-intensive tasks such as producing textiles, garments, footwear and travel equipment or phases with low added value in the supply chain. This trend hardly bodes well for Vietnam.
Fourth, as the RMB becomes dearer, the number of Chinese visitors to Vietnam will jump, helping local tourism take off. However, it is important to prevent Chinese tourists from turning into illegal workers in Vietnam.
In conclusion, as the RMB appreciates, Vietnam is bound to face various consequences. Whether the increase in China’s exchange rate is a curse or a blessing depends on Vietnam’s policies and efforts.