China’s currency crisis signals an economy in decline

More importantly said economist Le Dang Doanh, former director of the Central Institute of Economic Management (CIEM), because Vietnam businesses depend heavily on Chinese imports, the nation as a whole will most likely face greater trade deficits in the short term following the devaluation.

China's central bank last week allowed its currency to drop against the dollar for three consecutive straight days.

The Chinese yuan/US dollar (CNY/USD) exchange rate fell by 1.1% on August 13, on top of the previous 1.9% and 1.6% drops on August 11 and 12, respectively.

“This is a remarkable drop in value especially in such a short time span," said economist Doanh.

"Previously, Chinese exports, for a variety of reasons, were already lower in price than those of most [if not all] other countries in the region. The devaluation makes them yet less expensive.

The fact that it raises China’s price competitiveness in export markets, including Vietnam is what really is troubling to me, said Doanh as that inevitably is going to add to the trade deficit Vietnam currently has with China.

China is a top trading partner of Vietnam, but the world's second-largest economy benefits more from the lopsided relationship than Vietnam does.

Last year, Vietnam businesses shipped US$14.9 billion of goods to China, but spent nearly US$43.7 billion on purchases from the northern neighbour resulting in a trade shortfall of US$28.8 billion, according to official statistics, Doanh underscored.

The HSBC Security Company in turn agreed with Doanh and has estimated that Vietnam’s trade deficit would raise 2.4-3.2% in response to the 4% devaluation relative to the Vietnam dong.

Chinese products likely to flood market

The Vietnam government should respond to the devaluation by stepping up its Vietnamese buy Vietnamese campaign said Doanh.

Most importantly, Vietnamese products are still more highly competitive in terms of quality than Chinese products, Doanh pointed out, adding that the government should capitalize on this competitive edge in attempts to raise foreign investment.

For his part, Pham Quoc Thai, an economist from the Institute of World Economics and Politics said the devaluation is likely to lead to a flood of Chinese goods on the Vietnamese market.

Meanwhile yet another economic expert Nguyen Chi Hieu agreed  with Thai saying that as a fallout of the move more Chinese products entering the Vietnam market is inevitable, whether they arrive here by unofficial or official channels.

Agricultural products face more risks

One can think of currency devaluation as a kind of nationwide sale. There are thousands of businesses in China that sell goods to customers in foreign countries like Vietnam and those goods are generally priced in terms of the yuan.

So as the yuan becomes less valuable relative to the dollar, Chinese imports suddenly become cheaper here in Vietnam.

In other words, when the yuan falls by 4%, as it has over the past days, it's as if every business in China has cut its prices for Vietnam by 4%.

Of course, everything just said works in reverse for Vietnam. As the yuan gets cheaper from the perspective of Vietnamese consumers, the dong gets more expensive from the perspective of Chinese consumers.

That means it's getting more expensive for Chinese people to import Vietnamese-made goods, so they're most likely to import fewer of them.

Industries that are most disadvantaged include consumer products, steel, fertilizer, agri-forestry and aquatic products, mineral and rubber for which China is Vietnam’s main buyer.

Lower demand for Vietnamese goods could mean slightly slower economic growth here in Vietnam said Truong Dinh Hoe, secretary general of the Vietnam Association of Seafood Exporters and Producers (VASEP).

Rice, coffee, and rubber exported to China might fall into the same category. Rice exports to China could drop strongly in the coming time due to the weak yuan and become less competitive compared to that from Thailand and Indonesia.

However it is imperative to understand that the Vietnam government is in a good position to offset many of the negative effects of the cheaper yuan through complex monetary policy.

The devaluation of the Chinese yuan is a strong signal that the Chinese economy is getting weaker. It just may be that had not the government intervened and devalued the yuan, market forces would have driven it lower even further.

The national economy on the other hand is strong and on the verge of major breakthroughs on a number of fronts. Vietnam businesses needn’t worry too much about China and should just keep focused of producing high quality Made-in-Vietnam products.

It’s quite possible that the devaluation of the yuan by China is a blessing in disguise as it signals a weak economy that is fundamentally in trouble.