China's devaluation of the Yuan: Consequences for Vietnam and the world

(Baonghean) - On August 11, 2015, the People's Bank of China announced a 1.9% reduction in the value of the yuan against the dollar. On August 12, 2015, China further reduced the value of the yuan by 1.6% and on August 13, 2015, it continued to reduce by 1.1%. For three consecutive days (August 11, 12, 13, 2015), the value of the yuan decreased by 4.6% against the dollar.

Illustration photo.

China avoids using the verb “devaluation” and instead uses the word “depreciation” for the yuan. Scientifically, “devaluation” is more correct than “depreciation.” In three days, the yuan lost 4.6% of its value, something that only happens once every 20 years. This is a big deal, or rather, a huge deal.

The yuan is not an international currency, so a 4.6% devaluation in three days, while a huge deal, would not shake global financial markets, but would force many countries to adjust their exchange rates against the dollar.

In the world economic field, perhaps the most prominent event in 2015 was China's devaluation of the yuan (3 days 4.6%). Economists and politicians around the world are interested in explaining many issues related to China's devaluation of the yuan.

1. Why is China devaluing the yuan at this time, what is the real purpose?

So far, there are three ways to explain this problem:

- Firstly, since 2014, the Chinese economy has begun to slow down, decline and show signs of recession. After a quarter of a century, the Chinese economy has continuously achieved a growth rate of around 10%/year, in 2014 it only reached just over 7%, in 2015 it is likely to fall below 7%. Exports in the first 7 months of 2015 decreased by 8.3% compared to the same period in 2014 (down 195.1 billion USD).

To restore export growth, China is forced to devalue the yuan. When the yuan is devalued, Chinese goods will be cheaper and able to penetrate foreign markets; conversely, goods of other countries exporting to China will face difficulties.

The above explanation is correct and agreed upon by everyone, but whether this is the main reason that pushed China to devalue the yuan or not is still a matter of differing opinions.

- Second, to deal with the economic downturn, in 2014 and early June 2015, the Chinese government launched many strong measures such as reducing interest rates, reducing the required reserve ratio and spending thousands of billions of yuan to save the stock market from collapsing (June 2015).

But all these measures failed to stem the economic slowdown and the dramatic fall in exports. Therefore, devaluing the yuan was the only option to save the economy after a series of previous easing measures failed to produce results.

This explanation is deeper, more comprehensive and is supported by many scholars and economists from Europe, North America and Asia.

- Third, some scholars believe that China's devaluation of the yuan is part of a broader strategy to include the yuan in the International Monetary Fund's (IMF) reserve asset system, also known as including the yuan in the IMF's special drawing rights currency basket.

This explanation makes sense because: on August 10, 2015, the International Monetary Fund (IMF) controlled by the US refused to include the yuan in the international reserve currency basket, immediately, on August 11, 2015, China announced the devaluation of its domestic currency (before August 10, 2015, 1 USD was worth 3.1162 yuan, from August 11, 2015, 1 USD was worth 6.1162 yuan, by August 12 and 13, 2015, the value of the yuan had dropped much lower). Some banking experts (Chinese) believe that China's devaluation of the yuan is China's reaction to the IMF's decision (refusing to include the yuan in the IMF's reserve currency basket) and is not related to the decline of the Chinese economy.

This explanation, scientifically, is only partly correct, that is, China's reaction to the IMF (dominated by the US) refusing to include the yuan in the IMF's special drawing rights currency basket. It is incorrect to say that the devaluation of the yuan is unrelated to the decline of the Chinese economy.

In short, in all the explanations for the reason why China devalued the yuan, there is one thing in common: it originated from the decline of the economy.

2. Consequences of China's devaluation of the yuan for Vietnam and the world.

Although the renminbi has not been internationalized and is not included in the IMF's special drawing rights basket (not included in the IMF's international reserve currency basket), China's economy is the second largest in the world (after the US), so China's devaluation of the renminbi will certainly affect the economies of other countries.

Depending on the nature and scale of economic relations with China, the consequences of China's devaluation of the yuan will be very different for countries.

The general principle is: when the yuan is devalued, Chinese goods become cheaper, causing China's exports to skyrocket. Conversely, goods exported to the Chinese market will become more valuable, meaning that the entrance for foreign goods into China is narrowed and difficult.

Basically, there are two different groups of countries, in terms of the nature and scale of economic relations with China: 1. The US, Japan, EU and 2. Developing countries in ASEAN, Latin America, Russia, Africa - Middle East. The US and the eurozone are less damaged by China's devaluation of the yuan because the value of exports to China accounts for only 0.7% of the US GDP and 1.5% of the eurozone GDP.

African countries that are heavily dependent on China economically are particularly vulnerable to a Chinese devaluation of the yuan. South Africa, Africa’s second-largest economy, the most developed country in Africa and a member of the BRICS group of emerging economies, has also been hurt by China’s devaluation of the yuan: the South African rand has fallen to a 14-year low and its stock market has suffered heavily.

Countries exporting raw materials to China (China is the main market) such as Brazil, Australia, Russia, Gulf countries... will suffer great losses, especially when China devalues ​​the yuan.

China is ASEAN's largest trading partner with two-way trade turnover in 2014 reaching 350 billion USD (the US dropped to 4th place with two-way trade turnover between ASEAN and the US in 2014 reaching only 206 billion USD). Therefore, ASEAN countries will have to bear great risks and losses due to China's devaluation of the yuan. The Singapore dollar (SGD), Malaysian ringgit, Vietnamese dong and currencies of Thailand, Indonesia... all lost 1 to 2% of their value compared to the dollar immediately after China devalued the yuan.

Among ASEAN countries (excluding Laos and Cambodia), Vietnam's economy has three fatal weaknesses (Achilles' heel):

Firstly, Vietnam's production and export capacity are far behind the average developed countries in the region (Malaysia, Thailand). In 2013 and 2014, FDI (foreign) enterprises accounted for 70% of export turnover, 11 economic groups and nearly 90 state-owned economic corporations - the pillars of the economy - and hundreds of thousands of private enterprises in Vietnam exported less than 30%. Vietnam's labor productivity is only 1/15 of Singapore, 1/5 of Malaysia, 1/3 of Thailand. That means the competitiveness of the economy in general, of Vietnam's goods and services is very low compared to China and the region.

Second, Vietnam has a huge trade deficit with China, which always accounts for 70-80% of Vietnam's total trade deficit. In the first seven months of 2015, Vietnam's trade deficit with China was 17 billion USD, and for the whole year of 2015 it will exceed 30 billion USD. After China devalued the yuan, cheap Chinese goods flooded into Vietnam like a flood and will drown many manufacturing industries and many Vietnamese businesses. Furthermore, the weakness in the fight against cross-border smuggling, especially the Vietnam-China border, has unintentionally helped cheap, toxic Chinese goods and food flood into Vietnam, causing havoc to the weak economy, causing very bad consequences for people's health and the development of the race now and in the future.

Third, Vietnam's public debt is very large. When China devalues ​​the yuan, Vietnam is forced to adjust the exchange rate of the Vietnamese dong (in essence, devaluing the currency). The adjustment can increase to 3-4% or even 5%. When the currency is devalued, public debt increases proportionally: if the currency is devalued by 1%, public debt increases by 1%, if the currency is devalued by 5%, public debt increases by 5%.

The World Bank (WB) has warned that Vietnam's public debt is up to 110 billion USD (not including public debt of enterprises, corporations, and state-owned companies), with interest expenses alone accounting for 7.2% of total annual state budget expenditures.

With the three basic weaknesses above, the Vietnamese economy is like a 30-year-old house. The devaluation of the Chinese Yuan (3 days 11, 12, 13/8/2015 was 4.6%) is just an opening move. Will the Vietnamese economy be able to stand firm and endure the heavier, more vicious moves of Beijing in the coming time?

3. China started a “currency war”? What do Vietnam and other countries gain?

Whether China is starting a currency war is a matter of debate. China (the central bank) denies that they are starting a currency war.

Some scholars believe that China's devaluation of the yuan is a proactive move to create a currency war. Others believe that there is no currency war, and that devaluation of the yuan is just a necessary measure to stop the recession of the world's second largest economy.

China's devaluation of the yuan has had a strong impact on the world financial market and forced most countries, especially those in Asia, Africa, and Latin America, to adjust their domestic currencies to the dollar to reduce losses.

Up to now (August 19, 2015), perhaps, the world financial market has only entered a "red alert" but has not yet truly entered a global currency war.

But the game doesn't stop there!

No one knows what “tricks” China will launch next. Only fools or mentally retarded people believe the sweet promises and commitments of Chinese leaders!

Of course, playing the game of financial currency is very dangerous. There are two things that China must consider: 1. The Chinese economy is not strong enough to do whatever it wants, the world's second largest economy itself contains many loopholes and bubbles (public debt, real estate). 2. The devaluation of the yuan coupled with the benefit of increasing exports is a big risk for the Chinese economy. They themselves have initiated a wave of capital withdrawal from China. Just one week after the devaluation of the yuan, nearly 200 billion USD left China.

Will the gains outweigh the losses?

Stop here or “play” further: continue to devalue the yuan?

Don't be subjective, when it needs to protect its "legitimate" interests, China is willing to devalue the yuan by 10% or even more. Of course, the Chinese economy will be submerged in that flood!

China's internationalization of the yuan has caused the economies of many countries, especially Vietnam, to face challenges and heavy losses.

That is clear. But is the world only going to lose and not gain?

Yes!

The most beneficial thing for countries and the international community through this "case" is to see more clearly the true face of China, to understand more fully and correctly China's unfair competitive tricks in the global economic and financial field.

The benefits that Vietnam gains from devaluing the yuan are greater than other countries. These are:

First, better understand the fundamental weaknesses of the current Vietnamese economy.

Second, more fully recognize the dangers of economic dependence on China.

Third, be more sober when cooperating economically with China.

Vietnam - China: neighbors are eternal, immutable.

But dependence on China (politically, economically, culturally) is not inevitable.

Cooperation with China is necessary. If the economy depends on China, it will push the entire Vietnamese people into misery and humiliation!

Associate Professor, PhD, Major General

Le Van Cuong

(Former Director of the Institute of Strategy and Science, Ministry of Public Security)