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Issue 08, 2008 (01 August)
 Key to Economy and Trade

Ripples of Economic Fluctuations in Vietnam Felt in YRD

The butterfly effect of economic fluctuations in Vietnam is becoming more manifest. Tech-Bank, Hailiang and Supor, three companies listed on China's SME board, announced the impact of investment projects in Vietnam on their corporate performance on 16 June. They all claimed that inflation in Vietnam does not have much substantive impact on the parent company since most of their Vietnam branches are US dollar-settlement operations established not long ago and only account for a small percentage of their portfolio.

Ningbo Tech-Bank is one of the first feed enterprises to venture into Southeast Asian countries. It formed the Vietnam Tech-Bank Tequ Feed Co. Ltd. with Sichuan Tequ Investment Co. in October 2007. The registered domicile of Tech-Bank-Tequ is Long An province, Vietnam, and its business mainly covers the production and sale of feeds for aquatic products, livestock and poultry. The company claims that since Vietnam is an agricultural country with a stable market for aquatic breeding, economic fluctuations, especially currency depreciation, do not have a major adverse effect on its investment in that country. However, since the project is still in the development stage and does not require a lot of working capital at this stage, the project may still be affected by inflation, which may push the cost of engineering construction above the budgeted level and cause delays in engineering work and project completion.

Established in August 1989 with its headquarters in the copper processing belt in the Yangtze River Delta, the Zhejiang Zhuji Hailiang Group is China's biggest exporter of copper pipes. It has established the Hailiang (Vietnam) Copper Co. Ltd. and the Vietnam Hailiang Metal Products Co. Ltd. in Vietnam.

According to the Hailiang Group, its metal products company in Vietnam is situated in a bonded area where both land and property values are on the rise. The per unit construction value of its factory premises has increased by 31.4% from US$131.13 to US$172.31.

Commenting on the worsening inflation and dramatic currency depreciation in Vietnam, Supor said in its announcement that economic fluctuations have little impact on the operation of its Vietnam production base because its dependence on the Vietnamese economy is minimal. Supor Vietnam Co. Ltd. was established in April this year and is now at the stage of trial production. This subsidiary has not generated any sales revenue as at 31 May 2008.

Vietnam's economic crisis essentially stems from excessive capital inflow. Labour, resources and commodity supplies are unable to catch up with land supply or absorb the influx of capital within a short time. Vietnam's economic fluctuations mainly hit companies exporting goods to Vietnam and branches of Chinese trading companies in Vietnam. Chinese companies are hit by exchange rate fluctuations. Chinese companies in Vietnam try to steer clear of this adverse effect by requiring settlement of payments in US dollars or Renminbi. This has slowed down the pace of "going out" to some extent.

Take the textile industry for example. There are over 200 Chinese textile enterprises in Vietnam, accounting for about 10% of enterprises in this sector. Affected by local financial crisis, Chinese textile enterprises planning to invest in Vietnam are having second thoughts about such ventures. Jiangsu's Hodo Group is turning its eyes to neighbouring Cambodia. Construction of its factory in Cambodia has already started.

According to a Vietnamese media report, inflation rate soared to 25.2% in May and trade imbalance and rising commodity prices brought great pressure to bear on the economy. As a result of a drastic 64% increase in imports, Vietnam's trade deficit in the first half of this year is expected to increase by over 200% to US$16.9 billion. "This has led to payment imbalances and triggered exchange rate turbulence," the report said.

The Vietnamese government is making every effort to restore investors' confidence. Phan Huu Thang, director of the Foreign Investment Department of the Ministry of Planning and Investment, claimed that foreign investors' enthusiasm remained high in spite of present economic difficulties. In the month of May, a total of 130 foreign investment projects were approved and registered foreign capital amounted to US$7.5 billion. Total registered foreign capital reached US$14.7 billion and 324 projects were approved in the first five months of this year.

Chinese manufacturing enterprises are making Southeast Asian countries their first choice as destinations for "going out" in a bid to expand production capacity, achieve a global presence, steer clear of trade barriers, enjoy tax concessions offered to foreign investors, and escape the pressure of Renminbi appreciation and rising labour costs because these markets are close to China, have a manufacturing sector that is developing at more or less the same speed and scale as China, and have a relative advantage in manpower and other costs.

The Vietnamese government has revised its policy of trading with China after 2006. Chinese enterprises can now set up production plants in economic zones and are eligible for preferential policies. Chinese goods shipped to other Southeast Asian countries via Vietnam are entitled to the same treatment as Vietnamese goods. Procedures are quick and convenient. Application, once approved, is good for all times. Products produced by Chinese enterprises in Vietnam may be exported to other ASEAN countries. Enterprises do not have to declare their export plans in advance. They only have to complete export procedures at customs by presenting copies of their investment and operation licences. Vietnam has become a hot spot for investment because it has opened more and more sectors for foreign investment following its WTO accession in 2007.

The Business Association of China in Vietnam has nearly 300 members, covering such sectors as manufacturing, agriculture, services and trade. Manufacturing enterprises cover home electrical appliances, textiles and garment making. Among the Chinese enterprises in Vietnam, large and medium-sized operations, especially labour-intensive ones, are the hardest hit by inflation. According to Sun Yan, vice chairman of the Ho Chi Minh City branch of the Business Association of China in Vietnam, Chinese enterprises wishing to invest in Vietnam may consider the services trade now that labour-intensive enterprises are losing their advantages. Vietnam's full liberalisation of its retail sector in accordance with its WTO accession commitment after 1 January 2009 will provide Chinese enterprises with more investment opportunities.

Cambodia, Bangladesh and other neighbouring countries of Vietnam have been luring Chinese investment with offers of tax exemption and reduction in recent years. Investors should be able to find more opportunities in Southeast Asian countries other than Vietnam.