Abstract:Vietnam has the highest inflation rate in Southeast Asia (over 20 per cent year‐on‐year in 2011). This paper examines the extent to which inflation in Vietnam is due to its conduct of monetary policy. It is argued that, had the central bank implemented policy on a more timely basis, inflation would not have been as high as it was, but the more fundamental problem is that the central bank does not have the tools it needs to conduct monetary policy effectively. Monetary policy is further complicated by Vietnam's… Show more
From 2002 to 2011, China ran large surpluses in both the current and capital accounts of its balance of payments, which the People's Bank of China (PBOC) purchased and held at official foreign reserves to avoid nominal appreciation of the currency. Concurrently, with its massive purchases of foreign exchange, the PBOC compelled commercial banks to buy PBOC ‘sterilisation bonds’ and raised commercial bank reserve requirement ratios to avoid monetisation of its foreign exchange purchases and concomitant upward pressure on the price level (that is, real appreciation of the currency). Sterilising foreign exchange intervention, as China did for a decade, constitutes a violation of the implicit rules of a fixed exchange rate regime and as such can be seen as a mercantilist policy of manipulating the real exchange rate to gain, or avoid losing, international price competitiveness—what Corden (1981) termed ‘exchange rate protection’. This paper sets out the simple theory of the costs and benefits of exchange rate protection and provides back‐of‐the‐envelope estimates of their magnitude in China in the 2000s. It also explores the ‘other side of the story’, the decline in US manufacturing employment in the 2000s, which recent literature attributes to a ‘China Trade Shock’ that allegedly resulted from the US granting Permanent Normal Trade Relations (PNTR) to China in 2001. Here, it is argued that the so‐called China Trade Shock resulted from China's sterilised intervention policy, not the granting of PNTR. The implications of these competing hypotheses are considered in the conclusions.
From 2002 to 2011, China ran large surpluses in both the current and capital accounts of its balance of payments, which the People's Bank of China (PBOC) purchased and held at official foreign reserves to avoid nominal appreciation of the currency. Concurrently, with its massive purchases of foreign exchange, the PBOC compelled commercial banks to buy PBOC ‘sterilisation bonds’ and raised commercial bank reserve requirement ratios to avoid monetisation of its foreign exchange purchases and concomitant upward pressure on the price level (that is, real appreciation of the currency). Sterilising foreign exchange intervention, as China did for a decade, constitutes a violation of the implicit rules of a fixed exchange rate regime and as such can be seen as a mercantilist policy of manipulating the real exchange rate to gain, or avoid losing, international price competitiveness—what Corden (1981) termed ‘exchange rate protection’. This paper sets out the simple theory of the costs and benefits of exchange rate protection and provides back‐of‐the‐envelope estimates of their magnitude in China in the 2000s. It also explores the ‘other side of the story’, the decline in US manufacturing employment in the 2000s, which recent literature attributes to a ‘China Trade Shock’ that allegedly resulted from the US granting Permanent Normal Trade Relations (PNTR) to China in 2001. Here, it is argued that the so‐called China Trade Shock resulted from China's sterilised intervention policy, not the granting of PNTR. The implications of these competing hypotheses are considered in the conclusions.
“…After financing the current deficit, the rest of those capitals were purchased by the State Bank of Vietnam (SBV), the central bank, resulting in a large increase in foreign reserves on the one hand, and in an expansion of the money supply on the other. As pointed out by Pham and Riedel (), due to the absence of a liquid secondary government bond market, SBV had to intervene in the markets by buying up the excess supply of foreign exchange that was accumulated in the commercial banks and hold it as foreign reserves. The purchase of a large amount foreign capital by Vietnam dong (VND) led to an expansion of the money supply, which became a major factor for the spike in the inflation rate in 2007.…”
Section: An Overview Of Economic Development and Transition In Vietnammentioning
Thanks to doi moi, Vietnam was successful in escaping the poverty trap and emerged as a lower middle-income country in the late 2000s. From that time, however, the Vietnamese economy entered a new phase, which has been characterized by slow growth, weak international competitiveness, and macroeconomic instability. Apart from short-term problems associated with the management of increasing foreign capital, the major factors accounting for the difficulties of Vietnam's current economic phase can be attributed to the Vietnamese style of the gradualist strategy of transition from a planned to a market economy, which protects state-owned enterprises, and consequently to the failure to respond to the rapid rise of China. For further industrialization and sustained growth, Vietnam should embrace a new doi moi that follows the efficient type of gradualist strategy, with a special focus on new reforms of state-owned enterprises and a policy that promotes the country' s dynamic comparative advantage.
“…In many aspects, Vietnam represents a transition economic system, embedded with emerging market characteristics, which has sparked earnest academic interests. Before the 2008-2010 financial crisis started out, the country's fast-growing economy had already seen a 2-digit inflation raging, following years of overinvestment and sky-rocketing speculative and real estate asset prices (Pham and Riedel, 2012;Vuong, 2014). Domestic firms, both privately held and state-owned, tried all ways possible to acquire financial and land resources to expand, and also speculate.…”
This study investigates a longitudinal financial data set from 37 companies listed on Vietnamese stock market, during 2004-2013-a tumultuous transition period, which show major weaknesses of a less innovative system in a resource-constrained setting. The significance of relationships between operational scales, sources of finance and firms' performance reflects the nature of a business environment in transition and lower innovativeness. First, when an innovation strategy is absent, the obsession and over-emphasis of capital resources become overwhelming and persistent. Second, firm size shows mixed contribution to performance. Third, the study has found negative effects of sales and growth rate to ROE and profit margins, raising a question on the combined 'lower innovativeness' and 'tumultuous transition' setting. Finally, the effect of time is significant on key factors. These insights potentially lead to an advocacy of restructuring the corporate sector regarding usage of resources, market orientation and technological innovation for revamping competitiveness.
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