How could Vietnam respond to China's deflation?

China's consumer price index (CPI) dipped 0.3% year on year in July, the first reduction since February 2021

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According to the General Statistics Office of China, the country's consumer price index (CPI) dipped 0.3% year on year in July, the first reduction since February 2021, while the producer pricing index (PPI) fell for the tenth consecutive month, falling 4.4% in July.

Old "wound" reappears

The United States has spent most of the last 18 months battling to keep inflation under control. China is facing the opposite problem: people and companies are not spending, putting the economy on the cusp of a dangerous state known as deflation.

Consumer prices in China dipped in July for the first time in more than two years, according to the country's National Bureau of Statistics, after scarcely rising for many months. For ten months in a row, the wholesale prices paid by firms to factories and other manufacturers have been lower than a year ago. Property values are plummeting.

These tendencies have heightened fears about deflation, a potentially devastating pattern of generally decreasing prices that tends to erode family net worth – as it did in Japan for years – and make it extremely difficult for debtors to repay their debts.

Deflation is especially dangerous in a heavily indebted economy like China. China currently has more debt than the United States as measured against national economic production.

The Chinese government has forced domestic economists not to discuss the potential of deflation, although officially denying that deflation is a problem.

The researchers point out that China's economic stimulus programs are far more "thrifty" than those of the West. Since the start of COVID-19 till today, China has only released 2.4 trillion yuan, or roughly $300 billion USD, primarily for infrastructure projects, lowering salaries for employees and taxes for corporations.

Meanwhile, the early 2022 real estate crisis has not "digested" all of its harmful repercussions. This, together with the wave of record local public debt, offers several problems to the Chinese economy. Excess capacity in the private sector, investment cuts, and other factors are causing deflation in China.

Unbelievably, the unemployment rate of young employees (aged 16 to 24) in China's metropolitan regions has hit a new high, reaching 21.3% in June 2023. According to a Peking University poll, if 16 million young people with spare time are included, the youth unemployment rate might be 40% higher in the first half of 2023.

For the first time in ten years, China has lost its status as the greatest exporter to the United States, with Canada and Mexico taking its place. According to the US Department of Commerce, Chinese exports to the US totaled $203 billion as of August 8, a quarter less than the same period previous year. This is a symptom that the "world factory" is being disturbed.

China's import sector fell for the fifth month in a row. Imports in the nation decreased 12.4% in July alone. This demonstrates that domestic demand is quite low. The Chinese government has only set a 5% GDP growth target for the entire year of 2023, which has the rest of the globe worried.

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"The Chinese economy is squarely facing the specter of deflation, increasing the urgency of government measures to stimulate the economy and, perhaps more importantly, steps to rebuild household and business confidence," said Eswar Prasad, a Cornell University economics professor and former International Monetary Fund China division chief.

China's CPI and PPI

Impact on Vietnam

The Chinese economy has not expanded in the post-COVID period, as many thought, implying that deflation has begun. But why is deflation so frightening? Because it represents diminishing aggregate demand, which results in decreased economic activity, GDP, and so on.

Given that Vietnamese firms rely heavily on raw materials from the Chinese market, any changes in the RMB exchange rate would have an immediate impact on Vietnam's import and export. This occurred in 2016 when China undervalued the yuan, leading Vietnam to devalue the dong to respond. This scenario is quite likely to occur in the near future, since if China's domestic demand falls, the country may weaken the yuan in order to increase exports.

Furthermore, large Chinese manufacturers, which are now in a "hibernation" stage due to low manufacturing costs, will undoubtedly resurface in the near future, causing a flow of inexpensive goods to permeate various markets. This reality will put Vietnamese goods under intense competitive pressure, as has happened several times throughout history.

Many experts feel that in order to build an acceptable strategy, Vietnamese enterprises must constantly follow the future changes in everything from import and export to currency rates and interest rates, particularly China's CPI and PPI. Diversification of import and export markets is critical to prevent over-reliance on the Chinese market.