¡¡¡¡Vietnam, once known as Asia¡¯s ¡®Fifth little tiger¡¯, had an economic growth rate of only 6.5% in the first half of this year, and the inflation rate hit 26.8% in June 2008, the highest level in 18 years.
¡¡¡¡What is reason for Vietnam¡¯s economic turmoil? With the country¡¯s financial crisis detonate an Asia-Pacific financial crisis, as happened in Thailand, and what can China do to alleviate the situation?

¡¡¡¡The noted economist Rostow describes a stage of economic ¡®take off¡¯ in developing countries, and the development of the Vietnam¡¯s economy in recent years has surpassed this. From 1990 to 2006, Vietnam's average GDP growth has been 7.7%.

¡¡¡¡Hot money hastens the birth of the financial bubble

¡¡¡¡Vietnam¡¯s economy has become overheated. In 2005, investment began to pour into Vietnam, aimed at taking advantage of cheap labour and lax controls. The absence of effective monitoring and guidance together with excessive capital inflows induced a high level of over-investment in Vietnam. In addition, capital inflows led to funds outstanding for foreign exchange (refers to the national currency that banks accordingly put in owning to banks purchase foreign asset) ,creating Vietnam's domestic currency liquidity surplus and both pushing up prices on the one hand, and entering the capital market to hasten the birth of a financial bubble on the other.
¡¡¡¡With global commodity prices skyrocketing and in the face of the U.S. subprime mortgage crisis, it has been an undisputed fact that Vietnam is suffering from imported inflation. The Vietnamese economy is export-oriented, and economic growth depends mainly on exports of labour-intensive products and processing industries. According to statistics from the International Monetary Fund (IMF), since 2002, Vietnam¡¯s current account deficit has been in poor state.
¡¡¡¡In the short term, the Vietnamese economic turmoil will lead to foreign capital (particularly short-term) outflows, that place pressures on the international balance of payments and promote currency devaluation. Moreover, in the overheated economy and with a high level of hot money speculation in the capital market, the banking system may hit upon huge non-performing assets, resulting in some highly indebted companies facing bankruptcy or debt crisis, further aggravating inflation. After the crisis, it may prove difficult for Vietnam to attract foreign investment, and the economic growth relying on foreign investment may encounter obstacles.

¡¡¡¡New regulations and policy

¡¡¡¡The Vietnamese government has implemented a series of measures to counteract the country¡¯s financial instability. First of all, it has regulated the country¡¯s economic growth target of this year down to 7%, raising interest rates and the bank deposit reserve ratio to restrain excessive investment. Secondly, it has depreciated the exchange rate in order to reduce arbitrage capital flows. Judging from market reaction, these measures have yielded some results, and investors, confidence has recovered to a certain degree.
¡¡¡¡In the long term, the IMF believes that Vietnam's development prospects remain positive. The current financial turmoil is the result of conflicts within an existing economic system straining under external impact. If it can ride out the difficulties, however, the Vietnamese national economy will maintain its growth. From a systemic perspective, Vietnam has embarked on a market restructuring, helping the market more efficiently allocates resources. In addition, Vietnam has joined the WTO, making its market expansion good for labour-intensive export products. From an economic perspective, Vietnam still has an advantage on labour cost, and the development potential on resource industries, such as oil, coal and ores.
¡¡¡¡However, the current economic turmoil has exposed some challenges facing Vietnam, such as: the need to transition from a current managed floating exchange rate system to a more flexible exchange rate; the need to manage credit growth and enhance the stability of the financial system; and the need to maintain financial health.

¡¡¡¡Neighbouring countries strengthening ¡®market antibodies¡¯

¡¡¡¡One feature of a financial crisis in the globalisation era is of spreading ¡®infection¡¯ from market to another. Institutional investors in global financial market believe that economies similar to Vietnam or belonging to the same region as Vietnam have the same problems, leading to the concentrated reversion of capital flows. Currently, investors have a crisis of confidence in Vietnam, and the investment institutions¡¯ unilateral withdrawal of funds from the U.S. subprime mortgage sector led to capital reversion flowing to Vietnam.
¡¡¡¡It is reported that the possibility of economic turmoil in the Philippines, Indonesia, India and other countries impacted by Vietnam, has greatly increased. However, the current health of Asian economies has been considerably strengthened, compared with the financial crisis that out 11 years ago. Besides, accumulated experience in the prevention and management of financial crises, and the establishment of a regional crisis warning mechanism has thus far deterred international speculators from creating economic panic and attacking other countries¡¯ currencies.

¡¡¡¡China¡¯s economy withstands the crisis

¡¡¡¡As Vietnam¡¯s neighbour, China will be doubtless impacted by Vietnamese economic turmoil. Despite this, however, China's economy is much healthier and so the effect of Vietnam¡¯s economic turmoil is likely to be small. Several factors illustrate this. Firstly, since 2006, China has begun to take measures to prevent overheated economy domestically and avoid drastic ups and downs of the economy in a short period of time. Secondly, China has introduced a larger proportion of direct investment and, according to IMF reports, China's foreign debt has been good. Thirdly, China's foreign exchange reserves rank first in the world, without financial deficit. Fourth, China has expanded the floating range of its exchange rate, pegging to a basket of currencies, so the exchange rate risk has been reduced. Fifth, China's domestic market scale is continually expanding, progressively lowering the dependence on external markets.
¡¡¡¡From bilateral trade, the Sino-Vietnamese proportion of China¡¯s foreign trade accounted for just 0.5%, so there will be little impact by trade channels. From financial channels, after the Vietnamese economic turmoil, on one hand the financial panic will lead to some capital flowing out of the region. China is also facing pressure from capital outflows. On the other hand, China's relatively stable economic environment will attract some capital inflows. The former also includes speculative capital under Vietnamese economic turmoil impacting China¡¯s capital market to make arbitrage. The latter has changed the situation that foreign capital flowing to low-wage countries such as Vietnam owing to China¡¯s rising labour costs. From investment channels, Vietnam¡¯s economic development is still optimistic in the long term. Coupled with rich oil and mineral resources, and relatively low labour costs, Vietnam will retain a certain appeal for China¡¯s foreign investment. China and Vietnam have bright prospects for cooperation on oil, electricity and other aspects.