Rising yuan foreseen to fuel price rises

A rising yuan may not narrow Vietnam’s trade deficit with China. The People’s Bank of China said on June 19th that it would enhance the renminbi’s exchange rate flexibility by allowing the yuan’s value to rise.

The Chinese currency has been pegged since 2008 to the US dollar to assist Chinese exports. However, this has led to disgruntlement from some export partners.

The revaluation will make Chinese goods more expensive in other countries including Vietnam and could limit China’s exports to those countries.

“This will help Vietnam’s exports to China, but overall this is very bad news for our economy because imports from China will not reduce, while the prices will increase,” said Cao Sy Kiem, former State Bank governor and member of the Consulting Committee for National Monetary Policy.

“A rising yuan means that Vietnam will import inflation from China. This is a very big threat to our economy,” he added. At present, China is the largest country with a trade surplus with Vietnam. Last year, exports from the former to the latter hit $16.1 billion, while Vietnam only exported $4.8 billion worth of goods to China. In the first five months of this year, Vietnam’s trade deficit with China already hit $5 billion.

China is Vietnam’s largest supplier of machinery and equipment, textile and garment materials, steel, fuel, fertiliser, electronic products and consumer goods.

About half of all textile and garment materials imported into Vietnam comes from China, worth $1.13 billion over the past five months, and one-fourth of steel imports came from China.

Kiem said China’s import structure “cannot change immediately” even if a rising yuan would make import prices higher. This is because stopping importing materials and machinery would seriously impact on domestic enterprises’ businesses.

Kiem said the rising yuan would not help Vietnam narrow its trade deficit with China as exports to the northern neighbour would rise still be much lower than imports. Vietnam’s major exports to China are coal, wood products, rubber, cassava products and crude oil.

Vu Dinh Anh, vice director of the Institute for Market and Price, said the move would only serve China’s interests and would promote China’s outbound investments. As a result, increased investment from Chinese companies in Vietnam would bring about imported goods, materials and machineries from China to Vietnam, said Anh.

Phi Dang Minh, vice head of the State Bank’s Foreign Exchange Management Department, said a rising yuan would reduce the competitiveness of Chinese goods in big markets like the United States.

“While Chinese exporters find hard to increase exports in the US, they will find alternative markets. In this case, neighbouring markets like Vietnam are some of the best choices,” said Minh.

The widening trade deficit with China would seriously impact on the country’s balance of payments and could cause a high inflation in Vietnam, said Minh.

Trade deficit has been a big threat for Vietnam economy and hit $12.2 billion last year, accounting 21.6 percent of export turnover. The General Statistical Office announced that trade deficit from January to June this year was $6.7 billion, accounting 20.8 percent of export turnover.

Kiem said the only way to prevent impacts from the rising yuan was to further expand local production and promote domestic products to Vietnamese consumers.

VIR

Tags: fuel price, Yuan