Core Views
Since the implementation of the Reform and Opening-up (Doi Moi) in 1986, riding on the tide of globalization, Vietnam has successfully transformed from one of the poorest countries in the world to a middle-income country. Vietnam's development process has inevitably been significantly influenced by China, and its policies have also followed China's reform path step by step. Therefore, some foreign voices believe that Vietnam may become a supplement or substitute for China's manufacturing industry to a certain extent. This report is the first in our "Vietnam Economic Observation" series. It mainly reviews Vietnam's economic development process, analyzes Vietnam's current economic structure, and compares it with China.
From 1975 to 1986, Vietnam was in the ten-year exploration period of socialist construction . mainly imitated the Soviet model, concentrated on the development of heavy industry, and was committed to socialist transformation of the south and the abolition of the market-based price mechanism , the nationalization of trade and private enterprises has led to an increase in economic structural imbalances and is on the verge of a political and economic crisis.
The Sixth National Congress of the Communist Party of Vietnam in 1986 became a strategic turning point in Vietnam's economic policy, marking Vietnam's entry into a new era of reform and opening up. Agriculture has implemented household responsibility for production, and Vietnam has become an important food exporter. In terms of industry, the important role of multiple ownership structures is recognized, priority is given to the development of modern industrial sectors, and key industries are continuously adjusted according to the stage of economic development. Vietnam's economy has taken off, with GDP growing at an average annual rate of 7.6% from 1991 to 2007.
In 2007, Vietnam officially joined WTO, opening up to the outside world further expanded, and exports became Vietnam's most important growth driver. The private sector continues to develop. Solid fundamentals and rapidly growing trade cushioned the impact of the global financial crisis. These have helped Vietnam maintain rapid growth in the second decade of the 21st century.
Since the COVID-19 epidemic in 2020, Vietnam's economy has performed steadily, and the current social and economic blockade has been lifted. During the epidemic, the Vietnamese government introduced multiple rounds of stimulus policies to mitigate the impact. In terms of monetary policy, the Bank of Vietnam maintained interest rates at a low of 2.5% in 2021 after three rounds of interest rate cuts in 2020. In terms of fiscal policy, the government has launched two rounds of fiscal stimulus packages from 2020 to 2021, totaling 280 trillion VND, to expand public expenditures, postpone and cut taxes, and reduce administrative expenses.
Vietnam’s capital market has performed well in recent years. The Ho Chi Minh Index rose by 55% from 2020 to 2021, and the Hanoi Index rose by 360%, becoming the best-performing Asia-Pacific economy during the epidemic. The rise in stock prices is mainly due to solid fundamentals, easy monetary policy, and attractive market valuations. Since the outbreak of the Russia-Ukraine conflict, Vietnam's stock and bond markets have fallen under the impact of capital outflows and market sentiment.
Vietnam’s development experience is highly consistent with China’s reform and opening up, but as a small open economy, it is difficult to replace China’s position in the global value chain. Compared with China, Vietnam is mainly concentrated in the mid- and downstream parts with low added value. Its infrastructure is relatively weak, its economic scale and market depth are limited, and it is vulnerable to external shocks. In the long run, it is more complementary than competitive with my country. relation.
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1. Vietnam’s economic development history
As an important land neighbor of China in Southeast Asia, Vietnam has a long history of development. After the Vietnam Communist Party regime achieved national reunification in 1975, the planned economy occupied a major position in Vietnam. The country promoted the nationalization of industry and trade and adopted a collective agricultural system similar to the people's communes. During this period, Vietnam's domestic development was always slow, and material shortages caused inflation to rise. In 1986, Vietnam began to introduce price and market mechanisms, starting the historical process of Vietnam's version of "reform and opening up". Since then, Vietnam's economy has entered a period of rapid development. In 2007, with Vietnam's accession to the WTO, exports brought strong impetus to the economy. In recent years, with geopolitical tensions between China and the United States, Vietnam has attracted attention from the global supply chain due to its similar manufacturing development conditions to China. In the early days of the epidemic in 2020, the Vietnamese government responded promptly, achieved remarkable results in fighting the epidemic, and achieved outstanding economic performance. However, with the repeated outbreaks of the epidemic around the world and the recent deterioration of the international environment, downward pressure on Vietnam's economy has emerged.
. Vietnam’s economy before reform and opening up: before 1986
Before becoming a French colony in the mid-19th century, Vietnam was mainly dominated by the independent feudal small-scale peasant economy . China's Han Dynasty to Sui and Tang , northern Vietnam was once under the jurisdiction of China's counties (Annan, Jiaozhou) and was an important node in foreign trade in southern China. In 968 AD, Vietnam established an independent feudal dynasty. Since then, the government has changed several times for nearly 900 years. The economy has always been based on farming, and the handicraft industry has also developed to a certain extent.
In 1858, France started its colonial history in Indochina. In order to plunder raw materials and dump goods, France designated the south with a suitable climate to mainly develop agriculture and opened up a large number of rice, rubber, tea, cotton and other plantations, while the north took advantage of its mineral resources and mainly developed manufacturing, such as coal. , iron and non-ferrous metal mining, and carry out a series of infrastructure construction projects such as railways, highways and power stations. In terms of foreign trade, a port base centered on Shanghai and Saigon has been established.
In 1945, with the end of World War II, Vietnam established the Democratic Republic and launched a long-term armed struggle with European and American colonists centered in northern Vietnam. In 1954, the United States replaced France as the ruler of South Vietnam, and the North and the South were officially divided into the communist government in the north and the South Vietnamese regime supported by the United States. In the 1960s, the United States launched and fell into the Vietnam War. From 1954 to 1975, the North and the South were in a state of civil war for a long time. The economy continued to deteriorate and it became one of the poorest countries in the world. During this period, the north carried out enterprise nationalization reforms, launched the agricultural cooperative movement, and established people's communes. However, this led to a decline in farmers' enthusiasm for production, and the per capita grain share dropped from 360 kilograms in 1956 to 256 kilograms in 1974. The South, on the other hand, relies heavily on financial assistance from the United States, and its foreign trade develops slowly.
In 1975, the Communist Party of Vietnam government unified North and South Vietnam and entered a ten-year period of exploration in socialist construction. The main goals of the government include restoring the economic damage caused by the war and repairing the country's infrastructure and industrial base; extending a unified central planning system to the entire country; restarting the five-year economic plan and building Vietnam into a socialist economy within 20 years. During this period, Vietnam imitated the Soviet model, concentrated on developing heavy industry, and committed to socialist transformation of the south. The market-based price mechanism was abolished, trade and private enterprises were nationalized, the economic structure was further imbalanced, and the national economy was stagnant. At present, agricultural production efficiency is low, food and resources are heavily dependent on imports, domestic industrial production is small-scale, labor productivity is low, unemployment is high, materials and technology are in short supply, and consumer goods are seriously insufficient. In 1978, Vietnam ignored its internal problems of economic difficulties and sent troops to invade neighboring country Cambodia, which led to foreign sanctions and a surge in military expenditures. By 1985, per capita GDP stayed between US$200 and US$300, while the inflation rate remained in double digits, and it was on the verge of a socioeconomic crisis.
2. From reform and opening up to the Vietnamese economy before the global financial crisis (1986-2007): rapid take-off stage
The Sixth National Congress of the Communist Party of Vietnam in 1986 became a strategic turning point in Vietnam’s economic policy, marking Vietnam’s entry into a new stage of reform and opening up. Similar to China, the Vietnamese government has comprehensively reformed the economic system and development route, established a socialist market economy with privatization reform, open market and rule of law as the core, encouraged foreign direct investment, and reduced subsidies to state-owned enterprises. And actively participate in the international division of labor. In 1995, Vietnam and the United States began to normalize relations and joined ASEAN . Vietnam's economy began a process of comprehensive opening up to the outside world.
Agriculture has implemented household-based production quotas and has become an important grain exporting country. From the late 1980s to the early 1990s, Vietnam promulgated a number of land-related resolutions and laws, implemented household-based production contracts, and provided agricultural subsidies from the state. Vietnam has transformed from a grain importer to the world's second largest rice exporter, with production of commercial and industrial crops increasing significantly and export markets for coffee, cashews , pepper and aquatic products developing.Since then, Vietnam has continued to deepen agricultural reforms, exempted agricultural products from export taxes and operating rights restrictions, encouraged large-scale agricultural production, and granted agricultural tax incentives. While agricultural productivity increased, human resources, capital and other resources were transferred from agriculture to other sectors. In 1981, agricultural output value accounted for approximately 53% of GDP, but in 2007, the proportion dropped to 20%.
In terms of industry, the existence and important role of multiple ownership structures in Vietnam’s economy is recognized. removed restrictions on internal trade, increased the autonomy of state-owned enterprises, and approved the Foreign Investment Law in 1987. In March 1989, Vietnam passed a comprehensive reform plan aimed at stabilizing and opening up the economy, enhancing freedom of economic units and competitive choices, fundamentally changing the country's economic management system. In the 1990s, there were More than 50,000 private companies were established. Investment gradually plays a decisive role in economic growth. From 1990 to 2000, the average contribution of capital to GDP growth was 34%, which increased to 53% from 2000 to 2007.
Prioritize the development of modern industrial sectors and continuously adjust key industries according to the stage of economic development. After the reform and opening up process began, Vietnam identified food, consumer goods and exports as the main economic sectors. Investment in heavy industry and infrastructure also focused on serving these three main areas, giving priority to the development of the electricity, coal, oil and natural gas industries. During the "Third Five-Year Plan" period, the annual output of steel increased by 8%, the annual output of cement increased by 11%, the annual output of electricity increased by 11.1%, and the annual output of zinc increased by 10%. Oil extraction became an important industrial sector and accounted for the largest share of exports. In 1996, with the trade liberalization , Vietnam changed its main industries to food processing, manufacturing consumer goods, export goods, electronics and information technology. In 2001, Vietnam listed 11 sectors including energy, construction, and machinery manufacturing as leading industries.
Vietnam’s economy has taken off. Between 1991 and 2007, GDP grew at an average annual rate of 7.6%. The savings rate increased from 14.36% in 1990 to 37%. The proportion of the population living below the poverty line fell from 69% in 1990 to 25%. Inflation remains in single digits. High economic growth has pushed Vietnam's poverty rate down from 70% in the mid-1980s to 19% in 2007.
3. Joining the WTO before the epidemic: a new stage of opening up to the outside world
In 2007, Vietnam officially joined the WTO and entered a new stage of opening up to the outside world. Vietnam has significantly eliminated import and export subsidies and promoted deep integration into the global trading system. Since then, exports have become Vietnam’s most important growth driver. From 2007 to 2018, commodity exports increased by 384% and imports increased by 279%. Among them, the average annual export growth rate of the foreign direct investment sector was 21% and the import growth rate was 22%, while the average annual import and export growth rates of the domestic sector were 11% and 7% respectively. From the perspective of trade structure, after 2010, high-tech electronic products have become Vietnam's largest export commodity, and the proportion of crude oil exports in total exports has dropped from 20% to less than 5% year by year.
The private sector continues to develop. The government provides a number of support policies that benefit small and medium-sized enterprises in the areas of human resources, entrepreneurship, industry associations, merchant transformation, and industry information. Three key industries were identified between 2007 and 2020. Including mechanical engineering, electronic equipment, telecommunications and information technology and new technology products. In addition, 7 secondary industries have been identified, including textiles, leather and footwear, plastics, agriculture, forestry and fishery processing, bauxite mining and processing, steel and chemicals. By the end of 2019, non-state-owned enterprises accounted for approximately 97% of the total number of enterprises. %, and the proportion of non-state-owned enterprises and foreign-invested enterprises in new investment increased from 63% to 69%.
Solid fundamentals and rapidly growing trade cushioned the impact of the global financial crisis. In the fourth quarter of 2008, Vietnam began to be hit by the global financial crisis and economic recession. Export growth was weak and foreign direct inflows decreased. GDP growth fell from a peak in 2007 to 6.3% in 2008 and to 5.3% in 2009. But the economy began to recover in 2010, and since then, Vietnam's GDP has grown by more than 5% annually, reaching 6.8% in 2017. With rapid economic growth, per capita GDP rose from US$230 in 1985 to US$2,500.
4. From the epidemic to the current Vietnamese economy
Since the epidemic, Vietnam’s economic recovery has been relatively stable, and the current social and economic blockade has been lifted. In 2020, under the impact of the COVID-19 epidemic, although Vietnam's economic growth dropped to 2.91%, it was still one of the few countries in the world that maintained positive economic growth. In 2021, with the emergence of delta strain , the epidemic quickly spread to Ho Chi Minh City and key southern economic provinces, impacting various industrial parks, causing a large number of companies to suspend production, interrupting the supply chain of some industries, and severely hampering logistics and transportation. , the economy suffered a heavy blow. In 2021, Vietnam's GDP growth rate slowed to 2.58%, of which agriculture, industry and service industries increased by 2.9%, 4.55% and 1.22% respectively, accounting for 12%, 38% and 41% of GDP respectively. The main driver of economic growth is The driving forces are processing and manufacturing and finance, banking and insurance industries respectively. Exports soared to US$340 billion in 2021, a year-on-year increase of 5.1%, a record high, and imports reached US$332 billion, a year-on-year increase of 26.5%. The United States is Vietnam's largest export destination, and China is the largest source of imports. In 2021, Vietnam's surplus with the United States will expand while its deficit with China will expand.
In October 2021, Vietnam lifted the epidemic lockdown and accelerated the resumption of work and production. In the first quarter of 2022, GDP increased by 5.03% year-on-year, and imports and exports continued to grow. In the first quarter, foreign trade volume reached US$176.35 billion, a year-on-year increase of 14.4%. Since the conflict between Russia and Ukraine, Vietnam's foreign trade has been under pressure. The rise in commodity prices has pushed up import and export costs. Inflation has shown signs of rising, but it is still lower than the 4% target. Economic growth is expected to slow down in the second quarter.
During the epidemic, the Vietnamese government introduced multiple rounds of stimulus policies to mitigate the impact. In terms of monetary policy, after three rounds of interest rate cuts in 2020, the Central Bank of Vietnam kept interest rates unchanged in 2021 and guided commercial banks to reduce loan interest rates in appropriate ways. Based on the economic growth target of 6.5% and the inflation rate of 4% in 2021, the central bank has set the full-year credit growth target at 12%, which will be flexibly adjusted according to the actual situation. Vietnam's central bank continues to direct commercial banks to focus lending on manufacturing and other priority areas, while restricting lending to risky industries such as real estate and securities.
In terms of fiscal policy, the Vietnamese government has launched two rounds of fiscal stimulus packages from 2020 to 2021. A total of 280 trillion VND, accounting for 3.6% of GDP, is mainly used to expand public expenditures, postpone and cut taxes, reduce administrative expenses, etc. . Recently, the Vietnamese Parliament passed a post-epidemic recovery policy package to support economic growth in key areas and help Vietnam achieve GDP growth of 6.5%-7% during 2021-2025. The National Assembly has approved a package of approximately US$15 billion based on the resolution, which specifically includes reducing value-added tax and income tax, increasing government investment in health care, expanding investment in professional training and social security, and investing VND114 trillion to support transportation, digitalization, Water conservancy, climate change and other infrastructure projects, etc.
Rapid economic development has promoted remarkable achievements in poverty reduction. Economic growth is the most powerful driving force for poverty reduction and improves the welfare of the Vietnamese people. Per capita GDP increased from US$281 in 1994 to US$3,694 in 2021. Extreme poverty has basically disappeared, and more than 18% of the population has entered the middle class.
With the continued and stable development of the economy, Vietnam has set higher goals, In January 2021, The 13th National Congress of the Communist Party of Vietnam was held in Hanoi. It is clear that Vietnam’s overall economic and social development goal from 2021 to 2026 is to comprehensively promote industrialization and modernization, reach a per capita GDP of 4,700-5,000 US dollars by 2025, and enter the ranks of high-income countries by 2045. This means that per capita GDP will maintain an annual growth rate of about 5% in the next 25 years. In the post-epidemic era, Vietnam's top priority is to continue to increase incomes, move up the value chain, obtain higher-quality health care and education, and improve the urban environment. Vietnam is also committed to developing in a greener and more inclusive way, and has pledged to achieve carbon neutral and by 2050.
2. Financial market
. Direct financing
Vietnam has established a financial market structure with indirect financing as the mainstay and direct financing as the supplement. Banks occupy a dominant position in the financing system. Vietnam has 2 policy banks: Social Policy Bank and Vietnam Development Bank.Local commercial banks in Vietnam include 4 state-owned or holding banks (Vietnam Investment and Development Bank, Vietnam Foreign Trade Joint Stock Commercial Bank , Vietnam Industrial and Commercial Bank and Vietnam Agriculture and Rural Development Bank), 31 joint-stock commercial banks, 16 financial companies and 10 financial leasing companies .
According to data released by the Central Bank of Vietnam, national credit growth will be 12.7% in 2021, and banks have provided 7.40 trillion VND (324 billion U.S. dollars) in low-interest loans to 1.3 million customers. In 2021, the non-performing loan ratio will rise to 3.8%. It is expected that consumer debt burden will continue to increase in the future, and the non-performing loan ratio may rise to more than 8%.
2. Stock market
The National Securities Commission of Vietnam was established on November 28, 1996. Currently, there are two stock exchanges in Vietnam, Hanoi and Ho Chi Minh. In addition to their respective main boards, the Hanoi Exchange also has an GEM market . As of the end of April 2022, the total market value of Vietnam's stock market was US$234.3 billion, accounting for approximately 90% of GDP, and there were more than 2,100 listed companies. According to statistics from the Vietnam Securities Depository (VSD), as of April 2022, there are more than 5.22 million investor accounts in Vietnam, of which domestic retail investors account for more than 90%.
From the beginning of 2020 to the beginning of 2022, Vietnam’s capital market has experienced strong growth. The Ho Chi Minh Index rose by 55% and the Hanoi Index rose by 360%, becoming the best-performing Asia-Pacific economy during the epidemic. The rise in the stock market is mainly driven by retail investors, which account for more than 50% of the trading volume in 2021. An average of nearly 100,000 new trading accounts will be added every month in 2021, which is three times the number in 2020. Since the beginning of 2020, Vietnam’s stock market trading volume has more than quadrupled, and the number of stocks with a market value of more than $5 billion has increased from 2 in 2015 to 11. The reasons for the rise in Vietnam's stock market are: first, the government's continued loose monetary policy has depressed the return on deposits, while other investment opportunities have been greatly affected by the epidemic; second, the Vietnamese economy has continued to perform well since the epidemic, and third, corporate valuations are relatively It is highly attractive. Vietnamese companies generally have relatively steady revenue growth, which forms the basis for optimism. The average price-to-earnings ratio of stocks is around 13 times. Fourth, foreign investment continues to flow in, reflecting the confidence of international capital in Vietnam. Remittance flows to Vietnam in 2021 are estimated at US$12.5 billion, a 10% increase from last year.
Since the outbreak of the Russia-Ukraine conflict in 2022, the Vietnamese stock market has experienced significant fluctuations and declines. The Ho Chi Minh and Hanoi indices fell by 23% and 36% respectively, reflecting the market's fragility in the face of external shocks and capital outflows. The net inflow of foreign capital into the ETF market in 2022 was VND1.84 trillion (USD80 million), far lower than the record VND13.2 trillion (USD575 million) in the same period last year. Recently, as the market gradually digests the impact, capital outflows have stabilized.
3. Bond market
Since Vietnam began to build a bond market in 1990, Vietnam’s bond market has experienced rapid development. In terms of national debt, In 2021, Vietnam's national debt issuance amount is 318 trillion VND. Due to economic pressure, the Vietnamese government raised the issuance plan for the year from 23 trillion VND to 324 trillion VND. In 2021, the yield curve will be lowered by about 50bp on average compared with 2020, and the 10-year government bond yield once hit a low of 2%. Since 2022, with the outflow of international capital and economic recovery, the government bond market has weakened, and the 10-year government bond yield has continued to rise to the current level of around 3.4%. For Vietnam's sovereign debt, S&P , Fitch has given it a BB rating, and Moody's has given it a Ba3 rating, and the outlook is optimistic.
In terms of corporate bonds, real estate and financial institutions are the main issuers in the Vietnamese market. In 2021, the total amount of bonds issued by Vietnamese companies was VND722.7 trillion (US$32 billion), an increase of 56% from 2020. Among them, real estate companies dominate, with an issuance value of VND318.2 trillion (US$14 billion), accounting for 44% of the total corporate bond issuance, a year-on-year increase of 66.3%. The number of real estate bond issuers increased from 141 in 2020 to 193 in 2021. In the past three years, the annual interest rate of real estate corporate bonds has been 10.3-10.6%, the highest level in the market. Bank issuance amounted to VND226.4 trillion (US$9.9 billion), accounting for 31.3% of the total issuance, a year-on-year increase of 73%. The average annual yield of bank bonds dropped from 6.34% in 2020 to 4.31% in 2021.Bonds of companies in the energy, mining, non-bank entities and infrastructure development sectors are approximately VND28-30 trillion (US$1.2-1.3 billion), accounting for 4% of total issuance, with average yields rising at 8.5%. primary market banks and securities companies are the largest bond holders, with total holdings reaching 373 trillion VND (16.0 trillion U.S. dollars), accounting for 52% of the total circulation.
4. Foreign exchange market
Vietnam implements foreign exchange controls, and the Vietnamese dong is not freely convertible. In 2016, Vietnam implemented the exchange rate reform , abolished the fixed exchange rate, and established a managed floating exchange rate system based on a basket of currencies. The Central Bank of Vietnam flexibly adjusted the central exchange rate in monetary policy and maintained the stability of the foreign exchange market through the monetary policy tool . The Bank of Vietnam adopts currency market policies (interest rates and credit), exchange rate policies (adjusting the central exchange rate and floating range), the central bank's entry into the market to buy and sell foreign exchange (controlling supply and demand in the foreign exchange market or expanding foreign exchange reserves), and foreign exchange management policies (such as encouraging exports and capital accounts). Capital inflows and restrictions on the domestic use of U.S. dollars, etc.), window guidance and official commitments (such as requiring state-owned enterprises to increase foreign exchange supply or announcing the maximum depreciation tolerance for the year) and other policy measures to stabilize the exchange rate . In the past four years, the Vietnamese Dong has depreciated by an average of 1%-2% against the U.S. dollar annually. Against the backdrop of a general sharp depreciation of Asian currencies against the U.S. dollar, the Vietnamese Dong has become one of the relatively stable currencies in Asia.
The Vietnamese government continues to be committed to developing the capital market. proposes that by 2030, the total market value of Vietnam's stocks will reach 110% of GDP; the total market value of the bond market will reach 58% of GDP; the average annual growth rate of derivative securities will be 20%-30%. Investment by 2025 The number of immigrants will account for 5% of the national population and 8% of the national population by 2030.
3. Vietnam’s economic development experience
. Promote domestic economic transformation and upgrading through deregulation and reducing operating costs
In recent years, Vietnam has formulated an “Industry 4.0” strategy, vigorously introducing new technologies and promoting industrial transformation and upgrading. Priority areas for technology transformation include public administration, public facilities, health care, education, manufacturing, agriculture, logistics, trade, information technology, finance and banking, etc., and a 10-year plan for the energy, transportation, coal and textile industries has been released. . The Vietnamese government has proposed to establish five technology companies with a market value of US$1 billion by 2025, and increase this number to 10 by 2030. By 2025, the total social investment in R&D is expected to account for 1.5% of GDP, the number of industrial patents ranks among the top 30 in the world, 20% of companies can use Industry 4.0 technology, and is committed to exporting new technology products to G7 countries.
continue to improve the trade environment and encourage the continuous development of the private economy. In 1986, Vietnam enacted its first Foreign Investment Law. Since then, the law has been revised many times to facilitate the entry of foreign investment and simplify the domestic administrative approval system. At the same time, Vietnam continues to strengthen the rule of law and has made great progress in contract performance, taxation, cross-border trade and promoting equal treatment of state-owned enterprises and private enterprises. In June 2017, the resolution of the Fifth Plenary Session of the 12th Central Committee of the Communist Party of Vietnam emphasized for the first time that the private economy is an important driving force of the socialist market economy, and passed the "Small and Medium Enterprises Support Law", which aims to provide legal support for the role of small and medium-sized enterprises in Vietnamese society. The status and role, national policies, support measures, etc. in the socialist market economy should be determined. The business environment has been greatly improved. In the "Global Competitiveness Report" of the World Economic Forum, Vietnam rose from 77th in 2006 to 55th in 2017. In the World Bank's ease of doing business ranking, Vietnam rose from 104th in 2007 to 68th in 2017.
2. Large-scale investments in infrastructure and human capital
Vietnam’s economic growth has been driven by major infrastructure development. In the past 10 years, the government's capital expenditure has exceeded 8% of GDP on average every year. State-owned enterprises, which mainly provide large-scale infrastructure, invest about 5% of GDP annually to support the rapidly growing industrial and manufacturing base. Electricity generation, transmission and distribution capacity expanded Vietnam’s per capita electricity consumption has more than tripled in the past decade. The number of households with access to clean water increased from 78% in 2002 to more than 95% in 2020; the electrification of rural households increased from less than 50% in 1990 to more than 99% after 2016.With the rapid progress of the fourth industrial revolution, Vietnam is paying more attention to strengthening the construction of Internet infrastructure, actively promoting the digitalization and networking of the economy, and striving to become a foreign investment and manufacturing center in Southeast Asia. Japanese and Korean technology companies such as Samsung , LG, Olympus and Pioneer, as well as a large number of European and American clothing manufacturers, have set up factories in Vietnam. Vietnam has become the largest clothing exporter in Southeast Asia and the second largest exporter of electronic products after Singapore .
The population structure is relatively reasonable, and investment in human capital is rising. At present, Vietnam's domestic fundamentals are solid, the population structure is good, income distribution is relatively reasonable, the quality of human capital is relatively high, and with the continuous growth of the population and the expansion of the middle class, the attractiveness of the Vietnamese market continues to increase. Vietnam's population is growing rapidly and currently has 97.34 million people, 50% of whom are under the age of 35. Vietnam has made significant public investments in primary education. As of 2015, Vietnam has achieved the Millennium Development Goal of universal primary education with a net enrollment rate of 99%, and is moving towards the goal of junior secondary education. Vietnamese students particularly excel in science, technology, engineering and mathematics. In the OECD PISA (Program for International Student Assessment) ranking, Vietnam ranks higher than many developed countries. Vietnam’s progress on human development indicators, including maternal health, electrification and literacy, underpins its economic development potential.
3. Integrating into the global value chain through trade opening
Vietnam regards international trade as the core strategy of economic innovation. Stable politics, low labor costs, favorable tax and investment conditions have driven Vietnam's export growth exponentially. Vietnam's total merchandise exports reached approximately US$336.3 billion in 2021, an increase of more than 50 times since joining ASEAN in 1995. Vietnam's trade dependence accounts for about 200% of GDP, which is similar to Singapore and far exceeds Asian countries such as Malaysia (120%), Thailand (100%) and Indonesia (30%).
Export commodities are becoming increasingly diversified. Since 2013, the share of machinery, transportation and equipment (including mobile equipment) in total exports has always ranked among the top three, becoming the world's second largest secondary supplier of electronic products after China, and its largest Export destinations are the United States, China, Japan and South Korea. Accordingly, Vietnam imports large quantities of parts and subassemblies, with electronic components accounting for 65% of imports. Vietnam's electronics industry and exports are driven by foreign investors. Nearly a third of Samsung's smartphones are assembled in Vietnam. Vietnam is also the second largest apparel supplier to the United States, Japan and South Korea.
actively expands free trade agreements (FTA) to lay a solid foundation for further opening up. Vietnam joined the ASEAN Free Trade Area in 1995. In 2000, it signed a free trade agreement with the United States, joined the WTO in 2007, and since then signed further agreements with China, India, Japan and South Korea. In 2018, Vietnam signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in 2019 The Vietnam-EU Free Trade Agreement (EVFTA) was signed in 2020, and the Regional Comprehensive Economic Partnership Agreement (RCEP) and the Vietnam-UK Free Trade Agreement were signed in 2020, significantly improving the level of opening up to the outside world. As of the end of 2021, Vietnam has participated in or is negotiating a total of 17 free trade agreements, of which a total of 15 have entered into force and are being implemented. The agreements not only bring superior trade conditions, but are often accompanied by technical assistance, which effectively promotes the domestic reform process.
The government continues to introduce incentives to promote the integration of Vietnamese enterprises into the global value chain. Vietnamese electronic components enjoy 0% import tax, and there are additional income tax benefits for investments in high-tech projects and industrial zones. The government also provides additional incentives in the form of labor and technology policies. The government also supports the research and development of advanced IT systems and the manufacturing of electronic products. In 2020, even though the epidemic disrupted supply chains, FDI continued to flow in, albeit below pre-epidemic levels.
4. Comparison of the positions of Vietnam and China in the global value chain
Since 2019, Sino-US trade frictions and the COVID-19 epidemic have accelerated a new wave of global industrial chain shifts, with Vietnam, Mexico and other countries becoming the biggest winners in trade disputes. Vietnam’s trade with the United States has grown significantly.Vietnam's trade surplus with the United States rose to US$81 billion in 2021 from US$63 billion in 2020, reaching a record high. "The transfer of China's industrial and supply chains to Southeast Asia" has become the focus of widespread market attention. However, Vietnam still has many shortcomings, which limits the substitution of China's export industries.
Vietnam mainly focuses on the mid-stream and downstream parts with low added value, while China has a relatively complete industrial chain layout. Vietnam's production activities in the technology industry are mainly concentrated in parts assembly and downstream components such as displays, consumer electronics, etc., lacking core technical support. Vietnam's localization rate of 36% is lower than that of China and India, its supporting industries are weak, and the production of components is still underdeveloped. Only 5%-8% of Vietnam's US$32 billion trade surplus with the United States is included in the value created by Vietnam. Vietnam's participation in upstream activities mainly involves low value-added products such as plastics, glass and packaging. There is a gap between Vietnam's comprehensive industrial strength and China's, which limits the transfer of production capacity of multinational companies. For example, between 2019 and 2021, Apple reduced its production base in China from 48% to 42%, and a large number of labor-intensive jobs were transferred to Vietnam. But at the same time, Apple has added 14 new high-value and knowledge-intensive manufacturers and suppliers in China, specializing in the production of optical components, sensors, etc.
Compared with China, Vietnam's infrastructure is relatively weak, which limits the improvement of production scale effects. Vietnam’s logistics industry is highly fragmented, with more than 3,000 logistics companies. The connection between different modes of transportation is relatively weak. Compared with other countries such as Singapore, Malaysia, China and India, Vietnam has one of the highest logistics costs, accounting for about 25% of GDP. From raw materials to delivery, goods go through multiple stages, which increases transaction costs. Moving up the value chain is therefore challenging.
There is a big gap between Vietnam and China in terms of economic aggregate and population size. Although the age structure of Vietnam's labor force is good, the total labor force size of 57.8 million is only 7% of China's. Even if Vietnam succeeds in attracting manufacturing industries such as electronics and textiles, it will not be able to replace China's overall output. In addition, there is still a shortage of skilled labor to handle complex processes, and there is a gap in labor quality compared with China.
In addition, globalization is also a double-edged sword for Vietnam's economy due to the lack of a deep domestic market as a buffer. Since Vietnam is in the middle and lower reaches of the value chain, its exports rely heavily on imported inputs. Rising global raw material costs will seriously reduce export competitiveness, hinder economic growth, and bring about inflationary pressure. At the same time, Vietnam's high dependence on foreign trade has led to insufficient market conditions in Vietnam, making its economy vulnerable to the economic downturn of its trading partners.
The trade structure between China and Vietnam is more complementary than competitive. Vietnam's exports to China are mainly concentrated in fruits, aquatic products, textiles and electronic products, while labor-intensive manufacturing relies heavily on Chinese raw materials and equipment. China is Vietnam's largest supplier of intermediate products, accounting for nearly 30% of Vietnam's total imports of intermediate products in the manufacturing industry. As Vietnam becomes more and more dependent on Chinese production inputs, the degree of integration between Vietnam and China continues to increase. Under regional economic integration agreements such as RCEP, there is broad room for the two to collaborate and open up the industrial chain in the future.
Risk warning: Changes in the international situation, industrial transfers
Article source
Report: Vietnam Economy: Eagle Spreading Its Wings - Part One of the "Vietnam Economic Observation" series
Time: May 21, 2022
Institution: CITIC Securities
Analyst: Huang Wentao
Research Assistant: Liu Tianyu
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