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30/12/2006 | Global Market Brief

Stratfor Staff

Vietnam formally joined the World Trade Organization (WTO) on Dec. 28, not long after the fifth anniversary of Chinese WTO membership Dec. 11. Although China enjoys a reputation as a land of limitless investment opportunity, Vietnam holds much of the same investment promise.

 

And Vietnam lacks some of the main challenges to investors in China, namely, the Chinese economy's excessive vulnerability to fluctuations in the global economy and its financial sector, which is burdened by a vast weight of nonperforming loans.

Vietnam offers many of the same benefits that have brought foreign businesses rushing to China's door. It has high gross domestic product (GDP) growth -- Vietnam will enjoy GDP growth of around 8.2 percent in 2006, while China expects a 2006 GDP increase of 10.5 percent -- a steadily opening economy due in large part to its WTO entry, and an abundance of relatively cheap, educated labor. Unlike China, Vietnam is relatively insulated from global economic fluctuations and is not weighed down by huge debts in its financial sector.

Only approximately 3 percent to 15 percent of Vietnam's loans are nonperforming. Vietnam's central bank officially estimated the country's bad debt at 17.8 trillion Vietnamese dong ($1.11 billion) -- or 3.18 percent of loans -- at the end of 2005. Foreign economists, by contrast, consider up to 15 percent of loans nonperforming. While these numbers do not meet Western standards, they are pretty good for Asia -- for instance, independent estimates have pegged China's bad debt at around 35 percent to 50 percent of GDP.

Although China has tried to clean up its financial system by shifting its bad loans from state-owned banks to asset-management entities, in the end, China is still stuck with a bunch of bad debt. Not only do China's banks suffer from bad loans, its economy largely has been dependent for years on subsidized loans, which have buoyed employment and fueled growth. Cutting off the money flow to the tens of thousands of economically questionable companies contributing to the debt problem will not be easy.

Vietnam, in contrast, will not have to play these shell games with its financial institutions because the problem there is just not as big. Fewer businesses have received subsidized loans and become dependent on what amounts to a government handout aimed at ensuring high employment. Consequently, the country faces comparatively fewer nonperforming loans. Ultimately, this makes Vietnam's shift away from funneling money into these industries that much easier than China's, not unlike the difference between ripping off a Band-Aid and having major surgery.

China's high percentage of nonperforming loans makes economic success all the more imperative for it. The country needs continuous, rapid growth to stay afloat, making high exports necessary to sustain growth. China's exports hit $583 billion in 2004, representing approximately 37 percent of GDP. While Vietnam's exports were only $23.7 billion that year, they represented 56 percent of GDP. Although Vietnam's exports are higher in comparison to its GDP, because of the makeup of its exports, China is more dependent on the health of the global economy to ensure continued growth.

China increasingly has moved from simple manufactured goods like textiles, shoes and plastics into more sophisticated electronics and mechanical equipment. Mechanical and electrical product exports hit $244 billion during the first half of 2006, more than two and a half times larger than the $91.5 billion of labor-intensive products such as textiles and apparel. The three sectors with the highest growth were transportation equipment (68 percent), telecommunications equipment (40 percent) and auto parts (37 percent). Vietnam, on the other hand, is dependent mostly on commodities and light manufactured goods. Most of Vietnam's export revenue comes from its six biggest currency earners: crude oil, garments and textiles, footwear, seafood, wood products, and rice.

Although the move to technology-intensive goods is usually seen as a positive sign of development, Vietnam will benefit from its current dependence on commodities and light manufacturing. While the country's educated population and system of ports provide the groundwork for a healthy high-tech industry (as Intel noticed and acted upon, evidenced by its $1 billion investment in Vietnam in November), the move will take time. In the meantime, the country will get on the ground floor with commodities -- things everyone needs regardless of price -- giving Vietnam a stable inflow of funds as it industrializes.

Although Vietnam has plenty of benefits that will entice foreign capital, it cannot draw all of Asia's foreign investment simply because the country is not that big. Its population is 84 million, clearly not enough to make a significant dent in the job market of 1.3 billion Chinese. Investors might choose Vietnam, however, over other seemingly less stable countries. Why
deal with Thailand, which has just faced a coup and flip-flopped on major financial regulations, when Vietnam is just around the corner?

Its relatively stable economy (by Asian standards) leaves Vietnam in a bright position as investors move to diversify their funds throughout Asia. To the north, China is increasingly focusing inwards on appeasing its vast inland population while
managing growth in its coastal regions. Vietnam, on the other hand, is making its debut on the world stage in a relatively strong position -- it is ripe for increased foreign investment and is enhancing its general attractiveness to global business.

CHINA: China's top legislature, the Standing Committee of the National People's Congress, on Dec. 24 initiated the lawmaking process to discuss a bill that would eventually unify income tax rates for domestic and foreign companies at 25 percent. China has faced criticism for years that its tax policies are unfair to domestic entities, since Chinese companies pay income tax at a nominal rate of 33 percent, while foreign companies pay an average of 15 percent. China's tax incentives have fueled the inflow of foreign capital, which hit $60.3 billion in 2006.

BELARUS/EU/RUSSIA: Belarus will stop deliveries of Russian natural gas to Europe through its pipelines unless Gazprom backs off on its demands for Minsk to agree to steep price hikes in 2007, Belarusian Deputy Prime Minister Vladimir Semashko said Dec. 26. Around 20 percent of Europe's natural gas supplies that come from Russia flow through Belarus; the rest comes in through Ukraine's pipelines. Gazprom lowered its initial proposal of $200 per 1,000 cubic meters to $105 per 1,000 cubic meters on Dec. 27, but the two countries have still not come to an agreement. Belarus currently pays $46.7, the same as Russian consumers. While Belarus gets all of its natural gas from Gazprom, 20 percent of the natural gas that Gazprom sells to Europe transits Belarus. In a similar spat that Gazprom had with Ukraine a year ago, Ukraine simply kept taking natural gas from the transit pipeline to fulfill domestic needs, leaving Europe with shortfalls.

CHINA: China rejected a proposal on Dec. 22 to break up the Agricultural Bank of China as part of a plan to sell shares and cut its record bad loans. As much as 26.2 percent of Agricultural Bank's $356 billion in loans last year were nonperforming, almost half of which came from state-directed lending to farmers and unprofitable rural loans. Agricultural Bank is the largest lender to the country's 800 million farmers. A bailout of the bank may cost more than $200 billion, or 13 times the money spent recapitalizing Industrial and Commercial Bank of China, China's largest bank by assets. The government wants to attract investors to the weakest of China's four biggest banks, but unless the government is willing to offer compensation for the bad loans somehow, investors will not be interested.

BRAZIL/CHINA: Brazil's Companhia Vale do Rio Doce (CVRD), the world's largest iron ore producer, and Baosteel Group Corp., China's largest steelmaker, agreed Dec. 22 to a 9.5 percent rise in iron ore prices for the year starting April 1, setting a benchmark for ore exports worldwide. This is the first time that a steelmaker from China has signed the industry's initial supply contract with CVRD, BHP Billiton or Rio Tinto, which control two-thirds or iron-ore trade worldwide. In previous years, Japanese or European steel producers have led the annual negotiations on behalf of steel producers. China's rapid growth in the industry, however, has made it the world's largest steel producer, accounting for around one-third of global production, and thus most appropriate to lead negotiations. The 9.5 percent increase is half of the 19 percent price rise in 2006-2007 and far below the 71.5 percent price hike in 2005-2006. This is the fifth year in a row that iron ore prices have risen, something that has not occurred since 1977-82, when prices rose six years in a row.

AUSTRALIA: The Australian government awarded export licenses on Dec. 22 to Wheat Australia to ship 300,000 metric tons of wheat to Iraq, while CBH will be permitted to export 500,000 metric tons to Indonesia. These are the first export licenses granted since AWB Ltd. (formerly the Australian Wheat Board) temporarily lost its monopoly on the industry following a scandal over $220 million in bribes paid to Saddam Hussein's government to secure wheat contracts. AWB had enjoyed monopoly control of Australia's wheat industry, which accounts for around 14 percent of wheat trade worldwide, for 67 years.

BRAZIL: Brazilian air carrier Varig was forced to leave the Star Alliance on Dec. 21, leaving the world's largest airline partnership without a Latin American partner for at least 18 months. Varig was forced out of the alliance after it shrunk following a near-collapse and restructuring earlier this year. The revived carrier can apply for membership again in the future. Applications for partnership typically take 12 to 18 months to process. In the meantime, Star Alliance's lack of a local presence could leave it at a disadvantage when competing against oneworld and SkyTeam, the two other alliances that dominate the airline industry. The three alliances were created to extend the route networks of their members and to provide cost benefits through joint marketing and purchasing.

SLOVENIA: Slovenia will become the 13th country to adopt the euro Jan. 1. Out of the 10 states that joined the European Union in May 2004, only tiny Slovenia (population 2 million) has met the requirements of fiscal responsibility and inflation control necessary to join the common currency.

RUSSIA/U.S.: Russia and the United States could enter an agreement on the use of nuclear energy in the first half of 2007, Vladimir Smirnov, the director of Russia's state-run nuclear energy exporter Techsnabexport, said Dec. 27. Russia and the United States are the two leaders in nuclear power technology. At present, Techsnabexport can only sell uranium to the U.S. Enrichment Corp., a special intermediary agent that operates as part of a program to convert weapons-grade highly enriched uranium into low-enriched uranium for use in nuclear power plants. Allowing tariff-free direct sales to U.S. power plants could drop the cost of nuclear fuel in the United States by half.

Stratfor (Estados Unidos)

 



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