China’s re-opening will only modestly boost Vietnam’s 2023 GDP growth

By Michael Kokalari
Sat, December 24, 2022 | 10:25 am GMT+7

VinaCapital’s chief economist Michael Kokalari explains why the Vietnamese economy would not see a major impact from China’s 2023 re-opening.

China is Vietnam’s biggest trading partner, and investors, policymakers, and others have asked about the impact that China dropping its “Zero Covid” restrictions will have on Vietnam. There was some initial uncertainty, and even skepticism, about how quickly China would remove its Covid restrictions after the December 7 announcements from key government officials.

Last week, China dropped many Covid testing requirements, scrapped contact tracing, and essentially stopped reporting Covid case numbers. Meanwhile, China’s Central Economic Work Conference (CEWC) reiterated the government’s commitment to an “overall improvement” of, and “reasonable growth” for China’s economy next year.

Given all of the above, a consensus is now forming that China’s domestic consumption growth will surge from about 0% in 2022 to about 7% year-on-year in 2023, and that China’s energy usage will grow by about 10% next year.

Consequently, investors and others are enquiring about how Vietnam might benefit from a resumption of Chinese consumption growth, although concerns are also mounting about the possibility that China’s reopening will exacerbate inflation, both in Vietnam and globally.

We expect China’s re-opening to boost Vietnam’s GDP growth by over 2 percentage points next year, driven by the full resumption of Chinese tourist arrivals in the second half of 2023 (note that Vietnam Airlines resumed some flights to China on December 9 and that Chinese visitors accounted for one-third of Vietnam’s total tourist arrivals, pre-Covid).

We also anticipate modest inflation pressures from China’s re-opening next year and note that inflation pressures in the rest of the world have clearly peaked and are now abating. Finally, while the most important impact of China’s re-opening on Vietnam is a likely full resumption of Chinese tourist arrivals in the second half of 2023, the most immediate impact has been an improvement in the sentiment towards the Vietnamese dong.

The value of the dong appreciated by over 5% during the last week in November and the first week in December (which was the time frame that encompassed China’s December 7 zero-Covid policy shift), driven by a circa 5% appreciation in the value of China’s currency over those two weeks.

The dong had depreciated by as much as 9% in mid-November due to this year’s surge in the value of the US dollar, so the dollar’s recent, modest decline also helped ease depreciation pressure on the dong, but the surge in the value of China’s currency was the primary factor the drove the rebound in the value of the dong that can be seen in the chart above.

Further to that last point, the value of the US dollar/DXY Index was essentially unchanged during the above-mentioned two weeks, and some fairly negative news about Vietnam’s trade balance and balance of payments came out during those two weeks, both of which make it clear that it was the appreciation in the value of the renminbi (CNY) that drove the appreciation of the dong.

It’s not obvious from an economic point-of-view why the recent appreciation in the CNY prompted an appreciation in the dong; Vietnam has a consistent 17%/GDP trade deficit with China, and an appreciation in China’s currency versus the dong exacerbates Vietnam’s trade deficit with China in the short-term via the so-called “J-Curve Effect”.

That said, market sentiment often overwhelms economic factors in FX markets, and the positive sentiment that China’s re-opening spawned led to a sharp appreciation in both the value of the CNY and the value of the dong. The opposite occurred in August 2015, when the sudden 3% depreciation in the value of China’s currency triggered an immediate 3% depreciation in the value of the dong, despite Vietnam benefitting from China’s depreciation.

We expected a similar sentiment phenomenon to boost the VN-Index, but we observe that China’s stock market achieved only a modest bounce in response to the government lifting its Covid restrictions and that Vietnamese investors are currently, primarily focused on various domestic issues that have impacted the market this year.

Impact on GDP growth

China is Vietnam’s largest trading partner, but Vietnam’s exposure to China’s domestic economy is quite modest, resulting in Vietnam’s GDP growth not being significantly hindered by Chinese Covid restrictions that impacted as much as one-quarter of that country’s economy this year.

Vietnam’s export growth to China was nearly flat in the first nine months of 2022, but only 14% of Vietnam’s exports are sold to China, so Vietnam’s GDP soared 8.8% year-on-year despite China’s lockdowns, in part because exports to the U.S. and the EU, which account for nearly one-half of Vietnam’s total exports, grew by 25% year-on-year in the first nine months of the year.

Furthermore, most of Vietnam’s exports to and imports from China are of production inputs and/or other intermediate goods entailed in the manufacture of electronics and garments accounting for two-thirds of the trade between the two countries. Some Vietnamese companies will benefit from China’s reopening, such as those that sell seafood and other agricultural products, but exports of products that are ultimately consumed by Chinese customers only account for around 5% of Vietnam’s total exports.

Effect on tourism, FDI

Foreign tourism contributed about 10% of Vietnam’s GDP pre-Covid, and foreign tourist arrivals are on track to reach 25% of pre-Covid levels this year.

We expect the number of foreign tourists will climb above 50% of pre-Covid levels in 2023 based on the assumption that Chinese tourist arrivals fully recover in the second half of next year. However, the pace of recent developments in China points to a possible faster full resumption of Chinese tourist arrivals, which could lead to an even larger contribution to Vietnam’s GDP growth next year than we currently expect.

We are aware of the concerns some investors have that the re-opening of China’s economy could detract from Vietnam’s appeal as a destination for FDI investment.

We see no possibility of this happening given that China has irrevocably damaged its appeal as an investment destination for multinational firms, and U.S.-China trade tensions have dramatically escalated this year.

Concerns about China’s increasingly erratic policy pronouncements are well publicized but we would emphasize that Chinese authorities held steadfast to the country’s “zero-Covid” policy for years and then abruptly dropped the policy, following what amounted to a one-day warning, when the Politburo announced its desire to “push for an overall improvement in the economy.”

U.S.-China trade tensions prompted multinational manufacturers to re-locate production facilities from China to Vietnam, or to set up new factories in Vietnam instead of China, evidenced by the fact that Vietnam’s trade surplus with the US tripled (from $25 billion in the first nine months of 2018 to $75 billion in the first nine months of 2022) while its trade deficit with China widened (from $19 billion to $52 billion over that same time period).

The Biden administration dramatically escalated trade tensions with China this year by announcing what amounts to an indefinite extension of Trump’s tariffs on imports from China, and with other severe measures, including a prohibition for US persons to work at some chip factories located in China.

Readers should also recall that there were already strong structural factors prompting FDI inflows to Vietnam before U.S.-China trade tensions emerged. Factory wages in Vietnam are around two-thirds below those in China, but the quality of Vietnam’s workforce is comparable to that of China according to surveys by the Japan External Trade Organization and others. Also, Japan and South Korea, which account for over half of Vietnam’s FDI inflows, both face serious demographic and intractable economic issues that compel companies in both countries to invest abroad.

China’s re-opening is expected to put upward pressure on food prices in Vietnam. Photo courtesy of Industry & Trade newspaper.

China’s re-opening is expected to put upward pressure on food prices in Vietnam. Photo courtesy of Industry & Trade newspaper.

Impact on inflation

Many economists believe China’s re-opening could fuel global inflation, but there is no concrete consensus that China’s re-opening will do so.

Some analysts argue that a resumption of Chinese production could help further ease the supply chain tensions that account for about half of the current US inflation rate, according to economists at the US Federal Reserve.

We expect China’s re-opening to put upward pressure on food and energy prices in Vietnam (which account for nearly half of the CPI basket) and note that some well-placed Chinese economists expect a 20% increase in Chinese pork prices next year, for example.

In the past, surges in Chinese food prices understandably drove Vietnamese food prices higher given the geographic proximity of the two countries, but there are some factors that are likely to limit the surge in China’s inflation rate (including food price inflation) in the first half of 2023.

First, China’s mandatory government lockdowns appear to be giving way to voluntary lockdowns in the country’s cities (which account for about 80% of the country’s consumption) because of widespread concerns among the population about contracting Covid at a time when the country’s hospitals are likely to be overwhelmed.

Consequently, economic activity and price pressures in China are both likely to get worse before bottoming out sometime in Q1. Epidemiologists at the University of Hong Kong expect China’s Covid wave to peak around late January.

Finally, China’s reopening boom will not be as powerful as the reopening in the U.S. and Europe because unlike the governments in much of the developed world, China did not over-stimulate its economy with freshly printed money and direct stimulus payments to individuals. Consequently, China’s money supply growth, which fuels consumer price inflation, remained modest through Covid, and there is less “pent up savings” in China to drive a surge in the country’s consumption and consumer prices.

Conclusion

Analysts and economists generally believe that China dropping its Covid restrictions will have a major impact on the economies of countries in Asia and around the world next year. We expect China's reopening will have a bigger impact on the economies of other ASEAN countries than it will on Vietnam due to those countries’ greater exposure to China’s domestic economy.

The most immediate impact of China’s scrapping of its Covid restrictions has been a circa 5% appreciation in the value of the dong, driven by a 5% appreciation in the value of China’s currency.

That said, the major benefit that Vietnam will accrue from China’s re-opening is likely to be a circa 2 percentage point boost to GDP growth next year driven by a resumption of Chinese tourist arrivals.

Finally, China’s re-opening is likely to cause some upward inflationary pressure in Vietnam, the impact could be mitigated by several factors, including a more prolonged reopening compared to the U.S. and Europe, as well as less pent-up savings and demand in China compared to the U.S. and EU.

Comments (0)
  • Read More
Vietnam property developer Novaland posts skyrocketing Q3 profit

Vietnam property developer Novaland posts skyrocketing Q3 profit

Novaland, a leading real estate developer in Vietnam, reported its after-tax profit hit VND2.95 trillion ($166.62 million) in the third quarter of this year, a 21.6-fold rise year-on-year.

Companies - Wed, October 30, 2024 | 10:59 pm GMT+7

Thailand fruit prices increase at the end of successful season

Thailand fruit prices increase at the end of successful season

Thailand’s fruit season is wrapping up this year with a notable surge in prices for durian, mangosteen, rambutan, longkong, and mango.

Southeast Asia - Wed, October 30, 2024 | 10:30 pm GMT+7

BlackBerry launches regional cybersecurity headquarters in Malaysia

BlackBerry launches regional cybersecurity headquarters in Malaysia

Canada-based BlackBerry Ltd has established an Asia Pacific regional headquarters for its cybersecurity division in Cyberjaya, Malaysia, which is now fully operational.

Southeast Asia - Wed, October 30, 2024 | 10:27 pm GMT+7

Malaysia faces rising cybersecurity threats

Malaysia faces rising cybersecurity threats

Malaysian users are facing a high level of cyber threats, which may coincide with the rapid expansion of data centers in the country.

Southeast Asia - Wed, October 30, 2024 | 10:24 pm GMT+7

Indonesia to develop 3 million more hectares of rice fields

Indonesia to develop 3 million more hectares of rice fields

The Indonesian government is working to implement a program to develop 3 million hectares of new rice fields to strengthen the country's food resilience amid global challenges and increasing population demands, national news agency Antara reported.

Southeast Asia - Wed, October 30, 2024 | 9:24 pm GMT+7

Singapore’s digital economy thriving

Singapore’s digital economy thriving

Singapore’s digital economy accounted for 17.7% of the island state's GDP in 2023, up from 17.3% in the previous year, according to its Infocomm Media Development Authority (IMDA).

Southeast Asia - Wed, October 30, 2024 | 9:21 pm GMT+7

Viettel, UAE’s Presight to boost Applied AI, digital transformation in Vietnam

Viettel, UAE’s Presight to boost Applied AI, digital transformation in Vietnam

Vietnam’s Viettel AI and the UAE’s Presight have agreed to jointly advance the development of Applied AI and digital transformation initiatives in Vietnam.

Companies - Wed, October 30, 2024 | 8:30 pm GMT+7

Vietnam utility EVN to build $277 mln transmission line to import power from China

Vietnam utility EVN to build $277 mln transmission line to import power from China

State utility Vietnam Electricity (EVN) has got the go head to build the VND7,010 billion ($277.2 million), 500 kV Lao Cai-Vinh Yen line for transmission in the northwestern region and to import power from China.

Energy - Wed, October 30, 2024 | 8:09 pm GMT+7

Jack Ma-invested fund unloads Vietnam holdings worth $130 mln in Q3

Jack Ma-invested fund unloads Vietnam holdings worth $130 mln in Q3

China’s Tianhong Vietnam Market Stock Initiated Securities Investment Fund (QDII) saw outflows of around RMB930 million ($130.4 million) in the July-September quarter.

Finance - Wed, October 30, 2024 | 4:53 pm GMT+7

Private lender HDBank reports strong profit growth in 9 months

Private lender HDBank reports strong profit growth in 9 months

Ho Chi Minh City-based private creditor HDBank's pre-tax profit surged 47% year-on-year to VND12.65 trillion ($499.6 million) in the first nine months of this year.

Banking - Wed, October 30, 2024 | 4:42 pm GMT+7

Real estate M&As gather pace as local firms struggle with capital insufficiency, restructuring: experts

Real estate M&As gather pace as local firms struggle with capital insufficiency, restructuring: experts

2024 is considered a vibrant year for mergers and acquisitions (M&A) in Vietnam’s real estate sector, as domestic property companies still face challenges related to capital and restructuring, according to experts.

Real Estate - Wed, October 30, 2024 | 4:14 pm GMT+7

Vietnam conglomerate Vingroup, UAE partner seek to build $3.5 bln data center

Vietnam conglomerate Vingroup, UAE partner seek to build $3.5 bln data center

Vietnam’s leading conglomerate Vingroup and the Middle East-focused Benya Technologies will jointly explore opportunities to invest in a $3.5 billion data center in Vietnam.

Industries - Wed, October 30, 2024 | 3:43 pm GMT+7

Commonwealth Bank of Australia further sells 10% stake in Vietnam bank VIB

Commonwealth Bank of Australia further sells 10% stake in Vietnam bank VIB

The Commonwealth Bank of Australia (CBA) has sold a further 10% stake in Vietnam International Commercial Joint Stock Bank (VIB).

Banking - Wed, October 30, 2024 | 1:17 pm GMT+7

Saudi Aramco seeks to invest in Vietnam, partner with Petrovietnam

Saudi Aramco seeks to invest in Vietnam, partner with Petrovietnam

State-owned Saudi Arabian Oil Group (Aramco), the world’s largest oil producer, is eyeing to invest in petrochemical-oil refining and petroleum distribution in Vietnam, said president and CEO Amin Hassan Nasser.

Energy - Wed, October 30, 2024 | 11:01 am GMT+7

Emirates seeks to expand presence in Vietnam

Emirates seeks to expand presence in Vietnam

Emirates, the flagship carrier of the UAE, has signed two separate memorandums of understanding (MoUs) with Vietnam Airlines and Vietjet as part of the airline's efforts to expand its footprint in Vietnam.

Companies - Wed, October 30, 2024 | 10:02 am GMT+7

Brightening outlook for Vietnam steelmakers with real estate recovery, infrastructure development: analysts

Brightening outlook for Vietnam steelmakers with real estate recovery, infrastructure development: analysts

While Q3 results among Vietnam’s steelmakers are a mixed bag of gradual recovery and continued losses, there are several factors pointing to a brighter outlook for the industry, analysts say.

Industries - Wed, October 30, 2024 | 8:00 am GMT+7