Analyses The Vietnam Economic Turbulence

In 2008 witnessed the most dramatic changes in the economy of Vietnam during the past two decades. The economic turbulence in Vietnam is not an isolated phenomenon. In the background of the globalization of the economy, what happens in Vietnam might expose the snags in the economic operations of PRC, and it is worthy of our learning.The economic turbulence of Vietnam is revealed in the following aspects: the soaring commodity prices, of which the soaring grain prices drive the rising prices of all kinds of commodities. In particular, since 2008, affected by the soaring upward trends of the prices of the oil on the world market, the raw materials and the grains, the inflation in Vietnam has been accelerating and the devaluation of the currency is expediting. The exchange rate keeps going down with sharp fluctuations. In order to check the appreciation of the nominal exchange rate, the Vietnamese government has purchased foreign exchanges on a large scale. However, the reduction of the foreign reserve has strengthened the forecast of the devaluation of VND. The stock plunged, and the property prices fluctuated violently by 50%. The reduction of the money supply also resulted in the liquidity concerns of banks. It is common that banks attracted deposits by granting higher interests. The finance is in the state of disorder with some joint-equity banks having difficulty in operation. The economic growth is apparently lower than expectation with obvious slow down. At the same time, the unfavorable balance of trade in Vietnam is serious, which, to a large degree, boosted the inflation. The economic turbulence of Vietnam has deep internal and external causes. Internally, one cause is that the defects in the economic growth pattern resulted in the overheating of economy and the imbalance of the international payment structure; namely, the economic growth pattern with too much dependence on the import and attraction of foreign investment was unlikely to realize the sustained growth. The eager pursuit of high economic growth by the government to implement the loan expansion accelerated the excessive liquidity. Under the circumstance of high investment, all this resulted in the large quantity of imports of equipment, parts and raw materials into Vietnam, the expansion of the unfavorable balance of trade and imbalance of international payment. The expansive fixed assets investments and investment concentrations resulted in the continuous expansion of fiscal deficit, which inflated further the assets bubbles. Another cause is that the financial sectors etc opened to the outside at too fast a pace with capital and financial accounts opening too early. Radical policy on foreign investment was formulated to attract FDI on a large scale, easily forming investment bubbles. FDI mainly focused on the sectors such as real estate, hotels and stocks. Owing to the fragility of the investment portfolio and the free inflow and outflow of the international hot money made it easy to form asset bubbles. This is caused by the too rapid opening of capital and financial accounts and the FDI. Thirdly, the financial supervision was not sound with too weak supervision and hidden snags in the banking system reform. The central banking system of Vietnam was far from developed, and the commercial banks growing rapidly imposed serious challenges to the regulation capability of the central bank. The supervision of the credit loans was also loose. The commercial banks in Vietnam, especially the private banks, were faced with greater credit risks. The rapid rise of the default rate put the bank operations into trouble. Externally, one cause is the severe external economic environment, gravely affected by the sub-prime loan crisis. Another cause is the impact of the international hot money and the surge of the foreign capital. The third cause is the epidemic of avian flu, the natural calamity in Northern Vietnam, which affected the harvesting of crops, leading to the rapid rise of the grain prices, driving higher the CPI in Vietnam.Faced with the economic turbulence in Vietnam, the Vietnam government has implemented a series of measures since March, 2008, including the implementation of tight money policy, stabilizing the interest rate, boosting the exports to reduce the unfavorable balance of trade, and strengthening the supervision of the foreign exchange market. Judging from the effects of the policies, the regulation and policy re-adjustment for more than half a year, the policy measures seemed effective with the economic turbulence brought under control basically. However, due to the defects in the economic growth pattern, over-dependence on imports, low efficiency and lack of competitiveness of the state-owned enterprises, and severe export situation etc, the contradictions and the hidden snags during the economic operations remain unsolved. The policy regulation also lag behind without sufficient force and lack of coordination and dependence on administration, which also restrict the overall effects of the macro-policy.With the occurrence of the economic turbulence of Vietnam, what people are concerned about is whether the economic crisis in Vietnam will cause the outburst of the financial crisis in Asia like that of Thailand in 1997. Comparative analysis shows that the economic turbulence of Vietnam will not trigger the regional financial crisis in Asia. To begin with, the economic situation in Vietnam shows that although the Vietnamese economy encounters unprecedented difficulty with a sign of financial crisis, it is not severe enough to cause the occurrence of a financial crisis and there is a fundamental difference between the Vietnamese economy and the Thai economy, which caused the financial crisis in the Southeast Asia. For instance, the Vietnamese capital market has not been fully opened, which makes it difficult for the global hot money to inflow and outflow freely to attach VND on a large scale. And the Vietnamese economy still grows at a certain rate. Furthermore, judging from the foreign debt structure of Vietnam, there are few short-term debts and there is a low level of actual risks in the foreign debts. The economic situations in other countries are basically smooth. Meanwhile, the Vietnamese government has made some positive adjustment and amendments to the related policies and their effects are showing, which pushes the economy developing in a right direction.The author makes the following judgment concerning the trend of the economic turbulence of Vietnam: the economic turbulence is unlikely to trigger the regional financial crisis in Asia. It is predicted that Vietnam will walk out of the shadow of the economic turbulence and is likely to realize rapid growth in 2009. On the other hand, in order to achieve stable and sound economic growth, Vietnam needs to improve the international competitiveness of its products, to shift the economic growth patterns, to increase the investment effects, to ameliorate the investment environment, to strengthen the macro-economic management and to improve the administrative management efficiency etc.The actual analysis and the prediction show that the economic turbulence of Vietnam will not have a substantial impact on the Chinese economy. However, adverse effects will be imposed on PRC, for example, the hot capital will have a greater impact on the financial market of PRC, and a great pressure will be imposed on the import and export of Chinese products, especially on the frontier trade, and losses of investments in foreign countries. It might also bring new opportunity to China in terms of the investment in foreign countries as well.As there is great similarity between Vietnam and PRC in terms of the social political system, the economic reform policy and the economic development pattern etc, the author puts forward the following constructive viewpoints through the comparative analysis of the economic turbulence of Vietnam: 1) It is imperative to establish a sound and efficient financial guard system. 2) It is necessary to implement the scientific development outlook to accelerate the industry transformation and economic restructuring so as to maintain the sound and rapid economic growth. 3) A cautious step shall be taken to open the capital and financial accounts and supervision shall be strengthened of the foreign capital flows and be on guard against the impact of hot money and to avoid the rapid appreciation of RMB. Three principles of being Active, Controllable and Progressive shall be applied. 4) It is necessary to keep pace with the times, to take actions that suit the local conditions, to improve the coordination, the timeliness and flexibility between the macro policies including the monetary policy. 5) It is essential to keep a rational level of foreign exchange reserve, to maintain the rationality of the currency structure of the foreign exchange reserves and to enhance the international exchanges and cooperation so as to avoid the occurrence of crisis and impact on the stability and security of the economy of PRC and to maintain the sound and rapid growth of the economy.