Global Economics

Sorry, Vietnam Is Not the Next China


Royal Bank of Scotland has issued a research report predicting that Vietnam's impact on global trade and inflation will be "marginal"

Vietnam is often compared to China. Consider the obvious: they are both communist countries; Vietnam's laws are often mirror images of Chinese rules, just translated into Vietnamese; and Vietnam is a rising manufacturing hub that boasted a booming GDP growth of 8.5% in 2007.

But on Friday, the Royal Bank of Scotland issued a research report titled, Vietnam: Not Another China, that puts right that myth by stating another obvious: Vietnam "lacks the same scale advantages. Its impact on global trade and inflation will also be marginal".

The report concedes that comparisons to China in the 1990s, particularly southern China, make sense. Hourly manufacturing wages are around $0.50, which puts it among the lowest in emerging Asia. Plus North Asian manufacturers are investing in Vietnam—indeed they accounted for half of total foreign investment in the country in the past five years. And Vietnam has been pouring money into its infrastructure system—from roads to ports, it's determined to be user-friendly, just as the six-lane smooth-as-silk highways in China are.

However, the RBS report points out that in the end Vietnam's impact on global trade will be marginal. "Vietnam's population, at 84 million, is smaller than that of Guangdong province (93 million), neighbouring Hong Kong. Moreover, Guangdong province accounts for just 30%, rather than 100%, of China's total exports, and has the advantage of drawing on the workforce in its neighbouring provinces, in particular Guangxi (47 million), Hunan (63 million), and Sichuan (82 million)."

According to RBS this is good news for the global economy. "Relocating labour-intensive production to Vietnam from China will have little impact on global consumer goods inflation. Hong Kong, Japan, Korea, Taiwan, and the United States accounted for the large share of foreign investment in China during the past decade. The median hourly manufacturing wage for these countries was $12.97 in 2005 versus $1.06 in China. The labour-cost saving of moving to China was thus large. The hourly manufacturing wage in Vietnam is just $0.60, by contrast, meaning the labour-cost saving of moving to Vietnam from China is far smaller."

And there's also some good news for China. RBS reckons that China's labour-intensive manufacturing is what is gradually migrating to Vietnam. However, capital-intensive production will likely remain in China as barriers to entry are higher and profit margins wider. And it was capital-intensive exports that explained 64% of China's export growth in the second half of last year—so China's keeping the quality of manufacturing.

Furthermore, a recent survey of Hong Kong-owned mainland Chinese factories indicated that just 14% of respondents are considering switching production to Vietnam, while 29% are thinking of remaining in China and simply moving further inland where land and labour costs are lower.

The report agrees with those who say Vietnam is the next Asian Tiger, it's just not the next China.

Wozniak is an editor at FinanceAsia.com.

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