When China Sneezes, Does Việt Nam Catch a Cold?

Published September 14, 2015 in Episode 21

Việt Nam is seen to be sort of an economic development darling, often described as a rising dragon in Southeast Asia, a “development success story.”

Việt Nam has shown steady growth for a developing country, at an average rate of 6.4 percent per year for the last decade, according to the World Bank. To its credit, Việt Nam is one of the fastest growing economies in the region. But that’s not the entire story. A number of other factors make Việt Nam sensitive to shock from other economies.  

So here are the 5 things you need to know about Việt Nam’s economy.

1. From basket case to growth

After the failed experiment of a centrally planned economy put Việt Nam on the brink of crisis, the country’s communist government reversed policy in 1986. It introduced the so-called “Đổi Mới” economic reforms and transitioned to a “socialist oriented market economy”. Those reforms have worked with time and much success, sprouting new enterprises - primarily small and medium-sized businesses - and even a stock exchange.  

Việt Nam also grew rapidly as agricultural exporter and has attracted a lot of foreign investments thanks to cheap labor. It’s not just economic policy that is driving growth. Việt Nam’s demographic is something special of a situation – two thirds of its population of 90 million is under the age of 35, hungry to work and spend.

But, economic growth has slowed because of Việt Nam’s inability to respond to macroeconomic pressure.

2. Structural problems make for unsustainable growth  

Growth does not necessarily mean a country is in a strong position. Another measure of health is how well a country weathers a storm, or how well it responds to macroeconomic pressures.

On that count, Việt Nam has historically not done so well. It went badly for Việt Nam during the ‘97-98 Asian financial turmoil, as in the Global Recession of 2008. This is in part a structural issue stemming from a political system based on personal profits –

STRATFOR East Asia analyst Rodger Baker points to endemic problems of transparency and corruption.

“How open is Việt Nam to foreign investment?” he asks. “How have these regulations changed or adjusted? Are foreign companies having problems, maybe not with the official paperwork, but with some of the unofficial ways with which Việt Nam is run.”  

Việt Nam is also plagued by inequality, inefficiency, inefficient public spending, a lack of bank reform, and fast-growing public debt.

Some analysts believe that becoming a part of the Trans-Pacific Partnership Việt Nam is currently negotiating will resolve many of these issues, while others believe the TPP isn’t enough.

“In the short run, the subdued economic growth is linked to soft domestic demand. But longer-term prospects will depend on whether Việt Nam can quickly address structural problems that can enhance the economic efficiency and competitiveness of the country,” says Victoria Kwakwa, the World Bank’s Country Director for Việt Nam. 

Will Việt Nam's leaders make the necessary social and political reforms to remove the structural deficiencies that hinder growth?

3. China, the elephant in the room

 China is Asia’s biggest economy and a slowdown in its economy, spells trouble on a global scale -- Việt Nam may just be the first domino.


In a surprise move many analysts saw as a way to prop up its economy, China devalued its currency, the yuan, on August 11, making China’s exports much cheaper. Before, it might have cost you $5 to buy a widget from China. Now, it costs only $2.  The move is making Chinese exports more competitive against Việt Nam’s exports, which spells bad news for Việt Nam. After all, much of Việt Nam’s economic growth comes from a strong foreign-invested manufacturing export sector (full report).)


And to top it off: Việt Nam also heavily relies on China for raw materials and as a buyer of its products. This deep reliance on its northern neighbor is amplifying Việt Nam’s exposure.  


“We share a border with China, so we import a lot from China, so if the economy is slowing down, I think cheap Chinese products would be easier to come in to flood the market here”

Phạm Lưu Hùng, associate investment advisory director with SSI Research in Hà Nội, told the Voice Of America

4. Monkey see, monkey do

When China devalued the yuan, Việt Nam didn't miss a beat. The government responded by devaluing the đồng. In fact, Việt Nam has devalued the đồng twice already this year, at one percent each time, in response to slow growth in the Southeast Asia region. While it has theoretically made exports competitive again, the move hurts foreign-invested companies that import materials for production. It also makes Việt Nam’s large public debt of more than 100 billion U.S. dollars harder to service. Continuing to devalue the đồng does not seem to be a sustainable strategy, especially if China continues to be unstable.  

5. Let’s look forward

Việt Nam still has a lot of potential. The private sector and foreign investments are giving the economy life, despite the weight of inefficient state-owned enterprises with large debts. If the government can reform banks and take a serious stance against corruption, there might be a possibility to provide loans and support for the private sector. And analysts say, Việt Nam must free up land and invest in infrastructure projects in conjunction with bank reforms

Another encouraging development: Việt Nam’s middle class is growing, set to double from 12 million to 33 million, according to a projection by the Boston Consulting Group. The middle class is eager to spend. It is also spreading to more rural areas, with the opportunity of commercial development in historically poor areas. If Việt Nam can lessen the inequality gap, there would be a huge market opportunity for companies to connect with new customers.

And that’s five things to know about Việt Nam’s economy. China has had a significant influence on Việt Nam. This is an opportunity to learn from China’s instability and to bring on the necessary social and economic reforms that will allow Việt Nam to continue to grow.