Cordial discussion on currency manipulation rumours

Deputy Prime Minister Vuong Dinh Hue last week arranged a phone call with US Treasury Secretary Steven Mnuchin to discuss a number of bilateral topics. High on the list was Vietnam’s currency and foreign exchange policy, which recently came into the spotlight as Vietnam ran the risk of being labelled as a “currency manipulator” by the US Treasury.

Specifically, international media reported last week that the US Treasury is preparing its biannual report on currency manipulators and that Vietnam might be included. There are allegedly 20 countries on the list, including China, Russia, and Malaysia. The EU is also covered.

According to media reports, the US’ criteria for the “currency manipulator” tag were also reportedly lowered. The three criteria as of now include frequent interventions into the foreign exchange market, an overall account surplus greater than 3 per cent of GDP, and a trade surplus over $20 billion with the US. Reports said that the second criterion is now reduced to 2 per cent, which may put more countries on the list.

In the case of Vietnam, the country is an export-led economy that counts the US as one of its biggest markets. This is a bone of contention for the current US administration, which has expressed intentions to reduce trade deficit. Not surprisingly, the other alleged “currency manipulators” are also export economies that sell more to the US than vice versa.

In the phone call with Mnuchin, DPM Hue noted that in 2018, US exports to Vietnam grew by 36 per cent to $12 billion, and Vietnam is one of the fastest-growing export markets for US companies. Mnuchin replied that he appreciated the $21 billion of deals that Vietnamese companies signed with their US counterparts this February, when US President Donald Trump visited Vietnam.

The two statesmen also discussed Vietnam’s currency and foreign exchange policies. Mnuchin acknowledged that Vietnam has been providing the US with necessary information. He hoped to receive more information from Vietnam in the future.

Experts believed that it would be unfair to label Vietnam as a manipulator of its currency, as the country has taken steps to push its currency market towards a more market-based direction.

Most significantly, Vietnam introduced the central reference rate in 2016, which measured the VND on a daily basis against a basket of six major currencies. Commercial banks are allowed to buy and sell the VND within a 3 per cent margin of this reference rate. Unlike the rigid fixed-rate system of the past, this takes into account daily movements of different currencies, thus helping the VND mirror market forces around the world.

“It’s clear that Vietnam doesn’t deliberately devalue its currency like some other markets that might have done to gain an export edge. It’s because the highest goal for Vietnam is macro-economic stability, benign inflation rates, and a steady inflow of foreign capital,” said Trinh Quang Anh, director at MSB Research Department.

In fact, a common complaint against “currency manipulators” is that export-led countries usually devalue their currency to protect their exports. China is usually accused of this tactic, especially when it devalued the yuan by 3 per cent in August 2015, sending shocks across the global market.

Experts emphasised that even as an export-oriented economy, Vietnam’s primary goal is to keep the VND stable. The VND is indeed among the steadiest currencies in the ASEAN, having gone up by only 0.21 per cent in 2017 and down by 2.14 per cent in 2018, while other currencies went through extreme volatility.

Professor Tran Ngoc Tho from the Ho Chi Minh City University of Economics said that devaluations bring more negative impacts to Vietnam than positive ones, partly because it can be interpreted as currency manipulation. Stock markets, exchange rates, and investment flows to Vietnam can be affected by this label, which is why regulators always strive to keep the VND steady.

Other analysts pointed out that the US might be more focused on its biggest trade partners than smaller Asian countries like Vietnam.

Chua Hak Bin, economist at Maybank Kim Eng (Singapore), told VIR that the pressure on Vietnam to correct the trade imbalance is lower than on China, Germany, and Japan, as it runs a smaller absolute trade surplus with the US.

“We think the risk is low that Vietnam will be officially labelled as a currency manipulator. We do not think the US will make Vietnam the next target given the current amicable relationship,” Bin said. “The Trump administration may also not want to pick unnecessary fights with other smaller Asian countries and alienate them amid an escalating trade war with China.”