Flexible Monetary Policy to Curb Inflation, Foster Macroeconomic Stability

2:16:23 PM | 28/8/2019

On August 20, the People's Bank of China (PBOC) lowered yuan value for a straight seventh day to a one-year low versus the US dollar, to 6,7671 yuan for one dollar. Following this move, the Chinese yuan on the international market fell by 0.7% before it recovered.

The Chinese currency lost about 8% in the last three months. PBOC - the central bank of China - previously alluded to its willingness to accept weaker domestic currency. A weakening currency may help China export more goods because they will be cheaper if they are traded in U.S. dollars to offset losses caused by tariffs imposed by the United States. This will therefore boost GDP growth, which expanded at the lowest pace in two years in the second quarter.

The move is also seen as China's “hole card” in the escalating trade war with the United States. However, the most vulnerable subject is trade partners from which it has big surplus, including Vietnam.

According to the Ministry of Industry and Trade, Vietnam’s exports, particularly agricultural merchandise, sank to a record low. Its July vegetable export tumbled 44.2% to US$144.2 million. In the first seven months ending July 31, agricultural exports to China fell 8.1% year on year to US$1.6 billion.

In trade relations with China, Vietnam always takes a trade deficit. The further yuan devaluation will widen its trade deficit with China. From January to July of 2019, Vietnam witnessed a trade deficit of US$19 billion with China, an increase of US$4.5 billion over the same period of 2018. Last year, the deficit was US$29 billion. Not only competing with each other in bilateral trade relations, Chinese goods also put significant pressures on Vietnam’s merchandise in the world market.

China's currency devaluation does not cause a significant impact on the United States but it exerts adverse impacts on many other countries, especially exporters such as Japan, Germany, South Kore, and Vietnam. And, this will affect Vietnam's economic growth in the medium term, said Mr. Le Xuan Nghia, member of the National Monetary and Financial Policy Advisory Council.

Vietnam is also posed to another threat: It was added to the watch list of currency manipulating countries from May 2019 by the United States. The question now is whether Vietnam should devalue its currency or not?

At the regular meeting of the National Monetary and Financial Policy Advisory Council for the second quarter of 2019, Deputy Governor of the State Bank of Vietnam (SBV) Nguyen Thi Hong said that the SBV worked with the U.S. Department of the Treasury on the latter’s expansion of the watch list that included Vietnam. The SBV affirmed that Vietnam’s monetary policy is aimed to control inflation, foster macroeconomic stability, support reasonable growth, manage flexible exchange rates in line with market developments and Vietnam’s specific characteristics, not to create international competitive advantages. In the past months, Vietnam has kept exchanging and providing necessary information to the US to clarify its operational direction, macroeconomic situation, current account developments, trade and investment in Vietnam for America.

According to Mr. Nghia, currency devaluation means racing to print more money to steal from neighbors and when it is played back by its opponent, a real currency war will take shape. He warned that monetary policy is the most important, not try to squeeze or try to loosen too much. A tightening monetary policy will harm the real estate market and hurt banks first because most loans are secured by real estate. So, at this point of time, it is necessary to have a relatively harmonized policy for markets to maintain trade investment in Vietnam, ensure inflation mentality and give businesses confidence in long-term investment.

Vietnam's commitment to exchange rate stability is built on low inflation, low interest rate, export recovery and higher economic growth. But like the rest of the world, it could not imagine that China would devalue the yuan this much. On August 20, the State Bank of Vietnam made a double adjustment: Raising the interbank exchange rate between VND and USD from 21,673 to 21,890 (or revising it up by 1%) and widening the exchange rate band from +/- 2% to +/- 3%.

The SBV explained that this decision aimed “to actively lead the market, anticipate adverse impacts of the likelihood that the U.S. Federal Reserve will adjust interest rates in the coming time” and stated that “the exchange rate of Vietnamese dong has enough room to be flexible before unfavorable developments in international and domestic markets, not only from now until the end of the year but also in the first months of 2019, so as to build up the resilience for the forex market and ensure the competitiveness of Vietnamese goods.”

As a currency war is just around the corner, experts recommended that the Government pick up the pace of improving institutions and policies, reforming administrative procedures, improving the business environment, promoting technology and innovation, resisting corruption, reducing administrative costs, and shortening production and business time. For businesses, the best way to stabilize business operations, especially export performance, is to diversify markets, use technology and digitalization measures to adapt to and prepare financial resources for potential hardships in the long run.

Nguyen Thanh