China dumping US bonds: implications for Vietnam

US-China trade relations have witnessed increasing tensions recently

China was reported to have sold about $3 billion US treasury bonds so far. The country’s net selling of US bonds has been running for a month now, triggering concerns that China might be “dumping US bonds” as a weapon amidst escalating US-China trade tensions.

Economists assumed that it would not be a big concern if other countries started selling-off US bonds. However, if China, that currently holds nearly $1.2 trillion worth of US bonds, started dumping bonds, it could cast tremendous impacts on the global market.

For countries like Vietnam, an economic slump in the US could bring diverse effects, from exchange rate and investment capital flows to trade.

The first direct impact would be sharply reducing capital flows into the stock market and soaring exchange rate and foreign loan costs.

Economist Vo Tri Thanh, in a recent talk with VIR, assumed that China’s recently selling $3 billion worth of US bonds was just ‘a tactic,’ and the possibility of actually dumping US bonds was unlikely.

"Several regional countries like Thailand, Indonesia, and the Philippines have recently strongly revised their home currency exchange rates. While the benefits these countries have reaped from export are still unforeseen, they are struggling with growing concerns over rising inflation that has significantly pushed up lending rates. In my view, the SBV’s monetary policies in the past months have been rational," Thanh said.

This was shared by Dang Ngoc Duc, head of the Institute of Finance and Banking of National Economics University.

According to senior financial expert Nguyen Tri Hieu, only if the US economy is actually weakened by China’s dumping of US bonds could the Vietnamese economy be affected.

Particularly, the Vietnamese stock market would turn bearish due to impacts from the global stock market.

Besides, foreign portfolio capital might exit, while the exchange rate might experience volatility as both inflation and interest rates would rise sharply in the US.

This scenario, however, is highly unlikely.

“I do not think China will use the yuan devaluation as a tool to gain advantage in trade as when deciding on currency devaluation, a nation must look at three factors: the financial market and capital flows; macroeconomic stability, country debt, and inflation; as well as trade, export-import, and investment.”

“We should not only look at trade to say that China will allow the devaluation of the yuan,” said Vo Tri Thanh.

According to Thanh, the State Bank of Vietnam (SBV) has been doing a smart job of managing the exchange rate as during the year to date the interest rate only lost about 2 per cent, much lower than in regional countries.

On this issue, lawyer Bui Quang Tin stated that there is huge pressure on the exchange rate in the domestic market on account of the on-going US-China trade war and the danger that China might dump US bonds.

The SBV’s control of the exchange rate, however, has been based not only on currency situation in other countries, but also on macroeconomic and payment balance situation in the domestic market.

At this time, Vietnam’s payment balance and economy are fairly good, paired with the banking sector’s stable liquidity, allowing the central bank to keep the exchange rate increase below 2-3 per cent this year and in the next.