Monday, June 9, 2008

Is it a wise decision to move investments out from China to Vietnam?

By China Watcher

Just a few months ago, everyone was talking about making Vietnam a second destination for investments and establishing a manufacturing base, due to the prediction that China’s investment climate was now too complex and risky and that a major correction was due at any time. Vietnam was the darling of international investors and as an “emerging tiger”, it cannot be a wrong choice.

The Japanese and the Taiwanese were the first to shift or re-locate its factories in China to Vietnam due to China’s increasingly tight labor situation and the incessant hike in wages. Japanese political and historical riff with China before the present administration of Fukuda’s crafted a strategy to “Look Away From China”. The then Taiwan’s leader, Chen Shui-Bian also aggressively promoted its technology based companies to invest in countries other than China, especially in South-East Asia in order not to be overly dependent on its political “nemesis” or in short, not to be “black-mailed” in times of any potential political conflict.

Since last month, Vietnam’s currency, the Dong, began its gradual slide downwards. The statistical figures coming from the government department were also not that hopeful. Last week, there were warnings by economists of a financial crisis looming ahead and a possible financial meltdown of the Vietnam’s economy. If the financial planners and decision makers in the Vietnamese government make the wrong call in the months ahead, there is a big possibility of a ballooning trade deficit giving rise to a runaway inflation which may set the country back to its previous economic state.

Over the past decade, Vietnam had enjoyed a stable economic growth of about 8 per cent a year.

The growth of a middle class has also created demand for motorbikes, fanciful cell-phones and designer clothes.

The new confidence in the government in successfully turning the once centrally planned economy to a vibrant capitalist based economy also heralded a spree of spending as if there is no tomorrow. Inflation started to rise last November and is now in the double digit zone.

Recent data however confirmed that everything is not alright. Official data showed inflation last month hit 25 per cent. Data also showed the trade deficit for the first five months of this year hit US$11.1 billion (S$15.14 billion), close to the US$12.4 billion for all of last year. Soaring imports are the main cause and a slowdown in foreign direct investment to finance the deficit will reduce the already small foreign reserves. This will raise worries that the country could run out of foreign reserves to defend its own currency's value.

One market analyst commented that a sharp devaluation of the Vietnamese Dong is imminent in the coming months and possibly, in the range of 20 to 30 percent. Critics blamed the sorrowful state to the government’s poor and uncoordinated economic policies.

Although some foreign investors are entrenched in the country for the long-term but confidence has largely evaporated from the domestic business sector. Even at giveaway prices for the so-called blue chip companies at the local stock bourse, there are no takers. Credit rating agencies have cut their credit outlook for Vietnam to negative. And foreign investors are now taking their money elsewhere, depriving Vietnam of a key support for its growth and import appetite.

The financial industry will be shaken by a mountain of bad loans in the event of such eventuality and to restore confidence, there is high possibility that state banks may need to borrow abroad like from the IMF and World Bank.

In comparison, China is certainly better managed and the country is big enough to absorb shocks like this. Any currency speculators will think twice before trying to attack the Yuan due to the Chinese huge foreign reserves, now estimated at US$1.7 trillion.

In hindsight, those companies who stay put in China are considering how fortunate that they did not follow its counterpart footsteps’ to move out to Vietnam or other emerging low cost nations.

Though the West had been persistent in trying to run down China by highlighting China’s insurmountable problems related to environmental degradation and economic bottlenecks, China still remains the number one foreign investors’ destination in the latest survey from a reputable international magazine.

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