RMB devaluation makes little impact on Vietnam’s trade

As China continuously devalued its currency over the past three days, do you think that the People’s Bank of China (PBOC) will carry on its current fiscal policies towards the end of this week and during the subsequent weeks?

Until yesterday morning, we could see the market calm down after the PBOC announced that the necessary depreciation was achieved and there was no basis for continuing the currency depreciation. They also denied the rumour of a further 10 percent depreciation. The RMB bounced back around 1 per cent on account of the news and other regional currencies also experienced appreciation.

The State Bank of Vietnam (SBV) widened the dong's trading band on Wednesday to protect the country's currency against potential currency schemes and speculation. What is your view on SBV’s move?

With the latest movements of the USD/CNY, the State Bank of Vietnam has extended the trading band of USD/VND by +/- 2 per cent. This is a rather quick reaction by the central bank to lower the downward pressure on the VND. Currently, the market is waiting for SBV’s next move.

Therefore, for the last days, corporations have been lying in wait to see if the FX will continue to increase if the RMB continues to depreciate. They have only been selling USD to accommodate their payment needs. The need for USD for the last two days has been quite stable as this wave of market movements does not fall into the payment period, which is normally by the end of the month. On the other hand, importers are starting to show worry and there is a need to buy USD to cover future payments. In terms of banks, they have tried to buy USD/VND to cover short positions and reduce risks, which has created a demand on the market and pressure on the FX.

What are the reasons behind the yuan’s devaluation? And what are its impacts on the local economy?

According to the PBOC, the yuan’s movements are not targeted at pushing exports. Instead, they are to make the RMB more market oriented. As was assessed by the IMF’s report published last week, China's USD/CNY fixing mechanism is not transparent and flexible enough.

On another note, the IMF will soon conducts its review to see if the RMB can be included in their Special Drawing Rights basket. In this respect, the market does not expect exports to increase much with the depreciation of the RMB.

Even with this statement and although many Chinese imports (e.g. high-end electronics) do not compete directly with Vietnamese domestic goods, the fact is, China is one of Vietnam’s biggest trade partners and Vietnam’s largest trade deficit is towards China. In this regard the depreciation of the RMB does have an impact on Vietnam’s trade.

In terms of investment, I do not see this depreciation will stop the investment flow from China to Vietnam, since investors normally focus on the long term and they will rather look at Vietnam's competitive advantages like the cheap, skilled and young labour force. If Vietnam continues to improve in terms of infrastructure and has its FTAs concluded with other countries, the investment flow into Vietnam will definitely continue to be positive.

The complicated movements of the international FX markets can still impact the VND. Our advice is businesses, including importers and exporters, should consider using FX hedging tools to avoid risks.