How will China’s economic challenges impact Vietnam?

China's real estate market is gloomy and encounters stumbling blocks after the collapse of Evergrande.

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China’s solutions

China's real estate market is gloomy and encounters stumbling blocks after the collapse of Evergrande, as shown by:

First, home prices keep falling sharply.

Second, property businesses announced that they were insolvent and unable to repay their due debts. In the first six months of the year, defaults reached USD31 billion, up four times compared to the whole year of 2021.

Third, China's zero-COVID policy has led to prolonged lockdowns in big cities. It caused the construction progress and handover of numerous projects to be behind schedule and affected the launch of new projects as well as household income and mortgage payments.

Fourth, the wave of mortgage boycotts across China has exposed the precarious state of the country’s real estate sector as confidence in the real estate sector collapsed. The threat of a widespread boycott may cause banks and investors to tighten lending to property developers, adding to the backlog of projects.Besides, the fact that home buyers stop paying loans for delayed projects can hurt small banks, making the bad debt ratio of this sector the highest in the banking system.

However, it would not cause systemic risks thanks to high loan loss coverage ratios (LLCR) among Chinese banks. According to estimates of leading economic organizations, the scale of mortgages at risk as of 1H22 was at least CNY1.6 trillion, equivalent to 0.7% of total outstanding loans and 1.4% of China's GDP.

Fifth, the property crisis and the bankruptcy of some small banks start to affect local tax collection (fiscal risk).

The People's Bank of China (PBOC) maintains continuity, consistency, and stability in implementing the prudential management of real estate finance with the principle that "housing is for living in, not for speculation." However, its move to tighten credit flows into real estate amid the pandemic has weakened the economy with widespread boycotts, forcing the Chinese government to intervene to stop it from spreading into other parts of the economy. Specifically:

(1) Home purchase restrictions were lifted; (2) China relaxed mortgage loan rates and loan regulations; (3) Authorities allowed boycotters to pause payments without penalty; (4) The Chinese government urged local governments to monitor and accelerate infrastructure projects, and ordered local state-owned enterprises (SOEs) to acquire and complete backlogged projects from cash-strapped developers (Ha Nam province took action); and (5) The state required banks to prThe fund's initial size would be CNY80 billion (USD12 billion), with China Construction Bank contributing CNY50 billion.If this model works, other commercial banks will follow suit and raise the fund up to CNY200-300 billion (USD44 billion).

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Mr. Tran Duc Anh, Head of Macro & Strategy at KB Securities, highly appreciates the PBoC's efforts to rescue troubled financial firms. However, given the ongoing Zero-Covid strategy incorporating the liquidity crunch of property developers and weakening consumer confidence, it will take a long time to revive the economy. In addition, there are also some problems: (1) The above policies are said to prioritize SOEs, so they will not support the full recovery of the property industry, and (2) the losses the property industry is suffering look to outweigh the size of support packages. Therefore, China's real estate market will move sideways and steadily bounce back instead of following a V-or U-shaped recovery. The debt problems of real estate could weigh on the country for years, as this sector has long been the leading growth engine, accounting for around 29% of China’s GDP.

Impacts on Vietnam

The stagnation of the Chinese economy would cast a shadow over Vietnam’s economy and stock market. Shrinking consumer demand in China, as evidenced by a sharp drop in the consumer confidence index, combined with the CNY's strong depreciation against the USD, resulted in the following economic consequences:

First, Vietnamese commodities are subject to stiff competition from Chinese ones, and Vietnam's exports of key products to China in the first eight months of the year have dropped compared to 2021. In particular, exports of iron and steel (-95% YoY), clinker and cement (-36% YoY), oil and gas (-30% YoY), rice (-28%), and textiles (-8% YoY) all decreased.

Second, prices of raw materials such as coal, iron ore, crude oil, and steel plunged due to cooling demand in the Chinese market. Regarding steel and crude oil alone, China currently consumes approximately 50% and 13% of global demand, respectively.

Only the export of fishery products such as shrimp and pangasius to the Chinese market still enjoyed impressive cumulative growth in 8M22 because (1) demand was driven by compressed orders from 2021 due to domestic lockdowns; and (2) China eased regulations on imported seafood products. However, the export volume of shrimp and pangasius to China has slowed and gradually decreased following weak demand since June.

It is noted that China's supply chain disruption is considered an opportunity for Vietnam when foreign investors move production out of China for the following reasons: (1) Vietnam has fully opened international trade, making it easier for foreign experts to come to the country to study and sign contracts; and (2) Vietnam remains an ideal destination due to numerous FTAs, a favorable geographical location, an abundant workforce with relatively low labor costs, and state support measures,...

Besides, the substantial depreciation of the CNY against the USD may negatively affect foreign investors' confidence in the business environment in China, which contrasts with the stability of the VND. Accordingly, industrial real estate will benefit from this trend, namely Nam Tan Uyen (NTC), Phuoc Hoa Rubber (PHR), IDICO Corporation (IDC), Kinh Bac City Development (KBC).