China’s yuan (renminbi) has remained above the sensitive level of seven to the US currency for the last three days, hinting that trade friction between the US and China is entering a dangerous phase. The escalating tension between the two world powers is predicted to have negative impacts on Vietnam’s trade in the short term.

Illustrative image (Source: chinafocus.com)

The yuan on August 5 crossed the red line of seven to the US dollar, which has remained stable for 11 years since 2008, after US President Donald Trump threatened to impose new 10 percent tariffs on 300 billion USD of Chinese imports, effective from September 1.

The People’s Bank of China linked the fall of the yuan to the new US tariff threat, though in the evening of the same day it said China had no intention to use the yuan exchange rate as a weapon in the trade war.

China’s currency continued to depreciate in the following two days, being traded between 7.0235 and 7.0529 to a dollar on August 7, data of Bloomberg showed.

In Vietnam, analysts have predicted the fall of yuan may last a long time.

“The US-China trade issues will not likely be resolved and the tension may escalate in the future. At that time, the yuan exchange rate may be used to compensate for damages caused by US tariff hikes,” economist Nguyen Tri Hieu told Vietnam News.

According to Hieu, the US-China tension is not purely a trade issue but involves political calculation by Trump, especially when he is bidding for re-election in 2020.

With the slogan ‘America First’, Trump may not give concessions and if he went ahead with imposing tariffs on Chinese imports, China would retaliate, Hieu said.

Analysts predict China’s central bank will let the yuan gradually rise in the coming months.

According to UBS economists, the US dollar-yuan exchange rate could move to 7.2 at end-2019 and 7.3 in 2020 in the case of escalating trade tensions. But they also discounted the possibility of a sharp devaluation of the yuan as that could deteriorate the confidence of Chinese businesses and investors which could trigger capital outflows.

The State Bank of Vietnam on August 6 increased its daily reference rate by 15 VND to 23,115 VND per US dollar, its highest-ever rate. The reference rate on August 7 was set higher at 23,117 VND.

The USD/VNS exchange rates quoted by banks have not changed much though, trading between 23,155 VND and 23,285 VND.

Pressure on trade

The Vietnamese dong has only depreciated 0.3 percent against the US currency in the year to date. The local currency value was almost unchanged in the last three months, while the yuan has depreciated by about 4 percent against the US dollar.

“The yuan is cheaper compared to the VND, meaning Chinese goods are becoming cheaper,” Hieu said.

Vietnam was suffering trade deficit with China and if imports of Chinese goods into Vietnam rose, production and business activities of local enterprises would be negatively affected, he added.

Hieu said the Vietnamese central bank would likely continue its stable exchange rate policy but he suggested it “adjust exchange rates at a suitable margin or it would adversely impact Vietnamese goods sold to the world”, especially when major currencies have also lost value.

“The VND is allowed to depreciate by 3 percent this year which means the central bank has ample room to regulate the exchange rate.”

Mac Quoc Anh, vice chairman and general secretary of the Hanoi Association of Small and Medium Enterprises (Hanoisme), said about 70 percent of Vietnamese agricultural products are exported to China. The decline of the yuan would hinder Vietnamese exports, especially when China was raising its barriers in terms of food safety standards.

Vietnam has signed many strategic trade agreements with other countries, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreements (EVFTA), of which many members are not direct competitors to Vietnamese goods.

Anh said local enterprises, especially small and medium ones, should find and diversify partners, seeking support from Vietnamese trade counsellors in other countries and trade counsellors of foreign countries in Vietnam.

“However, one of the most important things when approaching foreign markets is that local enterprises must study markets carefully and keep their product quality and prices stable,” Anh told Vietnam News.

He has also suggested the central bank expand the number of prioritised sectors which can enjoy preferential lending rates to other areas such as mechanical engineering or pharmaceuticals to support enterprises.

Five prioritised sectors include agriculture and rural development; export; supporting industry; small and medium enterprises; and enterprises applying high technology.