Vietnam is becoming a victim of its own success

Expectations are starting to outrun reality as supply chains migrate from nearby China
Chief Investment Office18 Sep 2019
Photo credit: AFP Photo

Market news selected by the DBS Chief Investment Office



Vietnam is finding it hard to win a trade war even when businesses are trying to hand you victories.

The Southeast Asian growth engine has a young and growing middle class, a horde of free trade agreements, and a booming manufacturing industry. Businesses from Alphabet Inc’s Google to Crate & Barrel Holdings Inc are lining up to invest in the country as supply chains migrate from neighbouring China, which served as the world’s factory for the better part of two decades.

But Vietnam is starting to see expectations outrun reality. More and more businesses are complaining about congested ports and roads, rocketing costs for land and labour, and restricted regulations. Tapestry Inc, owner of the Coach and Kate Spade brands, has lamented insufficient infrastructure investment that has left some containers stalled on the waters. Eclat Textile Co Ltd, a supplier to Nike Inc, says it needs to diversify beyond Vietnam, including to cheaper locations.

Total disbursed foreign direct investment rose 6.3% to USD12b in the first eight months of the year from the same period in 2018, according to government figures, with the number of new registered projects surging 25% to 2,406. Here is what is at stake across capacity categories as Vietnam tries to lock in those trade war wins:

Port congestion: Infrastructure is the biggest challenge for Vietnam, especially at its ports. China claims six of the top 10 ports by container traffic in the world. Shipping container capacity will need to grow at almost twice its 10-12% pace of the past decade, as well as fold in third-party logistics and freight-forwarding practices to keep up with new demand.

Property prices: Land prices also are a constraint. The land costs in Bau Bang industrial park have doubled to USD80 per square metre (psm) from three years ago. The price at some parks in Binh Duong province has increased to USD150 psm from USD65 in 2016. Residential costs have increased in Hanoi and Ho Chi Minh City, with the former seeing a 20% price jump for condominiums in the second quarter from the previous year, and the latter experiencing a 4% jump on the primary market over the same period.

Regulation and bureaucracy: Vietnam has made strides in the World Bank’s Ease of Doing Business Index and the World Economic Forum’s Global Competitiveness Index. The business-friendly reputation has been helped by investment reforms, privatisation of state-owned entities, and free-trade policies.

Labour Force: The demographics are on Vietnam’s side. The share of the population that is of working age, or 15-64 years old, is set to remain larger than the averages across Asia and worldwide through 2025, according to data from the United Nations Population Division. And the government has expressed an appetite to upskill its workers, from its schools to the factory floors.

More broadly, Vietnam’s minimum wages in 2018 at USD180 a month were much cheaper than in Thailand (USD274) and competitive with Cambodia (USD170), according to analysts. Cambodia’s minimum wage already has risen to USD182 at the start of 2019, with talk of further increases as soon as next month. – Bloomberg News.

Australia’s S&P/ASX 200 Index was little changed at 6,695.30 at the open on Wednesday (18 September). It jumped 0.33% to 6,695.25 the previous session.

South Korea’s Kospi Index fell 0.15% to 2,059.16 early Wednesday. It inched 0.01% higher to 2,062.33 the previous session.

The Taiwan Stock Exchange Weighted Index (Taiex) slid 0.22% to 10,874.50.



China’s restrained approach to easing spooked financial markets Tuesday (17 September), with stocks and the yuan dropping the most in weeks.

The Shanghai Composite Index retreated 1.7%, its biggest decline in more than two months, to close below the psychologically important 3,000 level. CNY fell 0.37%, the most in three weeks, to 7.0950 a dollar as of 5:23 pm in Shanghai. The yield on China’s 10-year government bonds rose for a sixth day.

China’s central bank drained funds from the financial system and kept the one-year rate on medium-term loans steady on Tuesday morning, a move analyst said shows it is sticking with its prudent approach to stimulus. That is even after data Monday signalled the economy slowed in August, with industrial output, retail sales, and fixed asset investment rising less than anticipated.

Tuesday’s losses break the calm that had returned to the country’s stocks, bonds, and currency markets in recent weeks, helped by the expectation China would not allow anything to overshadow its National Day on 1 October. A thaw in the trade war had also helped boost sentiment.

The move from the People’s Bank of China comes after its cuts to banks’ reserve ratios came into effect this week (ending 20 September), adding an expected CNY800b (USD113b) in liquidity to the financial system. The Federal Reserve is widely expected to lower interest rates at its policy meeting this week. – Bloomberg News.

The Shanghai Composite Index slipped 1.74% to 2,978.12 on Tuesday and the Hang Seng Index lost 1.23% to 26,790.24.


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