Exchange rate scenario in the "storm" of the Chinese Yuan

Over the past year, despite the USD's appreciation, the State Bank has maintained its commitment not to adjust the exchange rate by more than 2%. However, immediately after China devalued the Yuan, the State Bank had to widen the band from +/-1 to +/-2%. Analysts have proposed several scenarios for exchange rate management assuming that the Yuan "storm" continues to exert pressure on the world financial market.

Commercial banks continue to narrow their negative foreign exchange positions and some may move to positive foreign exchange positions.

On August 14, Prime Minister Nguyen Tan Dung chaired a meeting with ministries and sectors on the devaluation of the Chinese Yuan and its impact on the Vietnamese economy. This meeting showed the timely response of the Government, ministries and sectors to the impact of the “Chinese Yuan storm” on the Vietnamese economy, including monetary and exchange rate policies.

Thoroughly fight against "RMB storm"

First of all, Prime Minister Nguyen Tan Dung highly appreciated the initial response of the State Bank in adjusting the exchange rate band from +/-1% to +/-2%. One notable point is: “Consistently implementing monetary and exchange rate policies, proactively and flexibly following market signals, ensuring the stability of the value of the Vietnamese currency.”

What is “following market signals”? Mr. Nguyen Manh, Director of BIDV Research Center, raised the issue of whether it is appropriate to carefully consider the story of China devaluing the yuan by 4.6% but Vietnam has just adjusted the technical margin from +/-1% to +/-2%.

However, banking expert Can Van Luc said that "when China devalues ​​the yuan by 4.6%, the Vietnamese dong should not be devalued accordingly."

According to Mr. Luc, this issue needs to be considered based on a number of factors, the first of which is the trade weight between the two countries.

Specifically, the proportion of Vietnam's import-export turnover with China accounts for 15% of Vietnam's total import-export turnover; the proportion of China's import-export turnover with Vietnam accounts for only 2.6% of China's total import-export turnover.

The figures of 15% and 2.6% show that Vietnam must pay more attention to its import-export turnover with China than the other way around.

Second, it is necessary to compare the inflation balance between the two countries to determine whether the Vietnamese Dong is valued against the Chinese Yuan, which is high or low in the exchange rate correlation between the two currencies.

Third, the fact is that the Vietnamese Dong has never been listed directly against the Chinese Yuan, but cross-listed through the USD. That is, the exchange rate between the Vietnamese Dong and the USD, between the Chinese Yuan and the USD, is calculated, and then cross-compared.

The reason for not listing directly is because the yuan is not yet a freely convertible currency and has not yet become a key currency in the IMF's currency basket like the USD, Japanese Yen, Euro, and British Pound as the IMF once required when China wanted to include the yuan in the international currency basket.

Fourth, another factor is the need to complete and standardize the import-export statistics between the two countries. The statistics on Vietnam-China trade turnover provided by Vietnam are always about 14 billion USD less than the figures provided by China.

In particular, China has very detailed statistics on border trade payments; while Vietnam has almost the opposite.

“From this figure, we can conclude the level of interdependence, to help determine the exchange rate relationship between the two currencies,” said Mr. Luc.

For the State Bank, after China adjusted the exchange rate, the Monetary Policy Department regularly updated the fluctuations of the yuan against the USD and the actions of the People's Bank of China. This was a necessary reassurance and showed no small amount of concern about the terrible fluctuations of the yuan against the USD.

According to this unit, since August 14, the exchange rate of the yuan/USD pair is self-adjusting to reach equilibrium and therefore, in the short term, there will still be certain fluctuations.

Forecasts for the movement of the Yuan

In a move to reassure the market, the Monetary Policy Department reassured the market that “The People’s Bank of China has taken many steps to stabilize the value of the yuan, and as a result, since the afternoon of August 13, 2015, most currencies in the region have appreciated against the USD. This shows that the international market is stabilizing and getting used to the frequent fluctuations of the yuan.”

Ms. Nguyen Thi Kim Thanh, former Director of the Banking Strategy Institute (State Bank), said that the possibility of China continuing to devalue the yuan, even at 10% as international financial analysts speculate, is unlikely for two reasons.

First, after the three recent devaluations, in response to speculation from international currency speculators, China immediately announced that it would not devalue to 10%.

Second, if China devalues ​​too much, it will affect many aspects of their economy such as imports being disadvantaged, foreign debt of enterprises increasing. However, it can be seen that in the coming time, China will manage the exchange rate more flexibly to move towards internationalization of this currency in order to achieve the goal of having the IMF recognize the flexible currency and include it in the international currency basket.

Regarding concerns about the depreciation of the yuan against the USD, BIDV Research Center commented that the depreciation of the yuan will create great pressure on Vietnam's trade balance in the coming time in the direction of encouraging imports, limiting exports and widening the trade deficit, assuming other factors remain unchanged.

If the nominal depreciation of the yuan reaches 10%, the trade deficit with China may worsen from the end of 2015 and continue into 2016.

The center also added that immediately after China adjusted its exchange rate policy, the Vietnamese foreign exchange market fluctuated strongly. The USD/VND exchange rate increased sharply by about 1.3%; market liquidity was quite weak, market sentiment was quite unstable, and there was initial hoarding of foreign currency and demand for early payment from customers.

This has led to a number of negative consequences, creating stronger pressure on demand from the serious hoarding of foreign currency. It should be noted that foreign currency mobilization in the first 7 months of the year has grown by approximately 7%, of which the population is over 11% and this trend will become stronger.

Another factor is that commercial banks continue to narrow their negative positions and some may switch to positive foreign currency positions.

Although the overall negative status has narrowed, with the status at minus 1 billion USD, the compensating buying force is still very strong even without taking into account the possibility of switching to holding a positive status.

Not to mention, the demand for businesses to buy foreign currency before maturity will increase. And with the current foreign currency loan balance of about 25 billion USD, if 20-30% of businesses buy and repay debts before maturity, the demand will increase to 5 billion to 7.5 billion USD.

According to VnEconomy