China slowdown, TPP to boost Vietnam

MORE supply chains are moving from Southern China into Vietnam in a trend that seems likely to increase. The World Bank says Vietnam also stands to benefit from the Trans-Pacific Partnership TPP), which could add eight per cent to its GDP . . .

HANOI — Vietnam is well placed to benefit from shifts in China’s economy, buoyed by the economic gains likely to unfold from a Trans-Pacific Partnership (TPP) trade pact.
Export growth is strong, while foreign investors are pouring in funds marking a shift in production to Vietnam from China.
“It’s in a pretty strong position with potential and benefits from rising costs in China,” says Daniel Martin, senior Asia economist for the Singapore-based research house, Capital Economics. In a recent report, the firm describes China’s economic malaise as in part due to manufacturing moving up the value chain as higher costs hit the mass production sector.
Economic growth at 6.5 to 7.0 per cent has been fuelling local consumption, aided by  
rising middle class, expansion in manufactur-ing and a positive property market.
“A lot of foreign firms are starting to choose Vietnam as a base of operations and moving investment away from China,” Martin says. “Foreign direct investment figures have been really strong for Vietnam – six per cent of GDP, which is way higher than anywhere else.”
An Asian Development Bank (ADB) report says rising foreign direct investment “helped to accelerate economic growth in Vietnam to six per cent in 2014”. Buoyed by overseas investment, Vietnam’s industry sector expanded by 7.1 per cent in 2014 from 5.4 per cent in 2013, while investment helped the manufacturing sector grow by 8.5 per cent.
In 2014, FDI commitments rose to US$15.6 billion, with an additional US$4.6 billion committed to existing foreign-funded projects.
The ADB says that for 2016, Vietnam is forecast to report growth at 6.2 per cent from 6.1 per cent this year. Hanoi-based World Bank lead economist for East Asia and Pacific,  Sandeep Mahajan, says the shift in investment from China enables companies to benefit from Vietnam’s low wages.
“You see a lot of investment with some supply chains moving from around Southern China down to Vietnam,” Mahajan told ATI. Vietnam benefits from its geographical location.
“Vietnam has an advantage which nobody else does, [whether its] Bangladesh, or Myanmar or Laos — because Vietnam is just next to Southern China where all these production supply chains are based,” he says. This means that Vietnam is able to capture a part of the supply chain and yet remain in the supply chain.
The end result is more “economic clustering” around Northern Vietnam to take advantage of the concentration of industry.
The other major advantage for Vietnam lies in its inclusion within the Trans-Pacific Partnership (TPP) that also involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and the US.
The World Bank’s Mahajan says Vietnam is set to be a major beneficiary from the TPP trade pact. “TPP is a winning scenario for Vietnam. The question is how much benefit they can
derive from it — it’s not whether they can
derive benefit.” World Bank estimates show that, cumulatively, by 2030, Vietnam’s participation in the TPP yields an additional 8.0 per cent to Vietnam’s GDP.
And Vietnam is being seen as standing apart from other TPP members in benefitting from the pact. Its nearest comparable economic rival in that group is Peru. “There could be so many global supply chains which could just as easily move to Vietnam to take advantage of what the TPP will produce,” says Mahajan.
“The TPP accounts for 40 per cent of global GDP. “Vietnam is the only middle income country in the group of TPP countries.”
Carl Thayer, an Australian-based regional defence analyst, says Vietnam’s economic relations with China will not be fundamentally affected by TPP membership. “China may be Vietnam’s largest trade partner by turnover, but the US remains Vietnam’s largest export market,” Thayer says in a briefing paper. “If Vietnam joins the TPP, it will have preferential access to the markets of all other members.”
If Vietnam uses Chinese-sourced materials to make goods for TPP members, Vietnam will face higher tariffs than if Vietnam sourced raw materials from other TPP members.
But Thayer says some Chinese business people have calculated it would still remain profitable for them to invest in Vietnam and sell into the US despite facing higher tariffs.
Further longer-term direction over the economy is set to become clearer with Vietnam’s 12th National Party Congress scheduled for early 2016.             
The Congress will also adopt Vietnam’s
Socio-Economic Plan over the next five and 10 years (2016-2025), as well as approving the
party Secretary General’s political report, revising the party’s platform, amending party statutes and electing a new Central Committee.
“The Congress is going to be important
because five years ago — when the last Congress took place — it was much more under a shadow of the global [economic] crisis, so everyone was distracted by short-term adjustments,” says the World Bank’s Mahajan.
The Government is expected to place greater focus on longer-term structural issues and
directional changes, he adds.
Key areas expected to garner attention
include the banking sector, State-owned enterprise reforms, and improving the environment for the domestic private sector with greater
access to land and finance.
But Mahajan says there are also longer-term issues, including management of urbanisation and the need to boost investment in innovation, as well as increase spending in human capital.
Pham Luu Hung, an associate investment advisory director with SSI Research in Hanoi, says other challenges include overcoming a fiscal shortfall amid sliding commodity prices, a curb on the current account deficit due to high import demand, and speeding up SOE reforms.
He says economic restructuring, including reforms to the banking sector and State enterprises, has “showed some progress”, as has the economy’s deeper integration into the global economy through several FTAs.
“In the short term, GDP growth could still be resilient, continuing the trend set in 2015,” Hung told ATI. He says foreign investment, the TPP and administrative reforms will be the
factors supporting Vietnam’s “growth
story”.