Falling yuan pulls Vietnamese exports along

Lead economist of the World Bank in Vietnam Sandeep Mahajan discussed the unstable yuan and its influences on Vietnam at a recent business luncheon held by the Malaysian Business Chamber in Ho Chi Minh City. In his speech, Mahajan noted that the yuan has been through a tumultuous last year due to the sluggish Chinese economy and a wavering stock market.

“We have seen $1 trillion worth of yuan flowing out of China in 2015, which is a record amount for the currency. As the Chinese economy slowed down and its productivity competitiveness faltered, more investors lost faith in the currency and began to flee the market. As a result, to keep up its exports, the Chinese government has significantly devalued the yuan, causing a domino effect in neighbouring countries like Vietnam,” said Mahajan.

He predicted that the yuan devaluation would continue to affect Vietnam in 2016, as 30 per cent of Vietnam’s imports and 10 per cent of its exports are conducted with China. China is also one of Vietnam’s major rivals in terms of exports to the rest of the world. Due to the large scale of this trade partnership, it is highly likely that the fluctuating yuan will continue to be a great concern to Vietnamese exporters and importers.

Mahajan also highlighted the fact that last year marked the yuan’s inclusion in the Special Drawing Rights’ basket of the International Monetary Fund (IMF). This will result in the yuan becoming more international, encouraging central banks around the world to fill their stocks.

“The inclusion itself is a symbolic move, as in reality the basket plays a limited role in global finance. Moreover, Vietnam does not have any IMF programmes that deal with the basket and its related loans, so overall, I do not think that the yuan inclusion will directly affect the country,” said the economist.

However, as an indirect consequence, the yuan will be more vulnerable to global currency fluctuations, Mahajan highlighted. This may lead to further volatility in the Chinese currency this year, which requires careful economic management in other countries, including Vietnam.

Mahajan then emphasised that despite the Yuan’s negative impacts, Vietnamese exports will be spurred by the multiple free trade agreements that the country has recently signed.

“More and more manufacturers are moving from Southern China to Vietnam to seize opportunities from the recent trade deals and benefit from Vietnam’s low wages. This will be a major weapon that helps Vietnam counter-balance the effects of the yuan devaluation,” said the World Bank economist.

The World Bank has recently reduced its 2016 forecast for growth in Vietnam from 6.5 to 6.2 per cent, citing falling crops from the El Nino as a major factor.