Vietnam: China Reopening Likely to Give Vietnam GDP 2% Boost in 2023: VinaCapital Economist

China’s reopening is expected to boost Vietnam’s GDP growth by over 2 percentage points next year, driven by the full resumption of Chinese tourist arrivals, Michael Kokalari, chief economist at investment fund VinaCapital, said in a recent report.

“We expect China’s reopening will have a bigger impact on the economies of other ASEAN countries than it will for Vietnam due to those countries’ greater exposure to China’s domestic economy,” the report said.

“The most immediate impact of China’s scrapping of its COVID restrictions has been a circa 5% appreciation in the value of the dong, driven by a 5% appreciation in the value of China’s currency.

“That said, the major benefit that Vietnam will accrue from China’s reopening is likely to be a circa 2 percentage point boost to GDP growth next year driven by a resumption of Chinese tourist arrivals.”

But China’s reopening is also likely to cause some inflationary pressure in Vietnam though the impact could be mitigated by several factors, including a more prolonged reopening compared to the U.S. and Europe as well as less pent-up savings and demand in China compared to the U.S. and EU.

Though China is Vietnam’s largest trading partner, Vietnam’s exposure to China’s domestic economy was quite modest, resulting in Vietnam’s GDP growth not being significantly hindered by COVID restrictions and resultant economic problems in that country.

Vietnam’s export growth to China was nearly flat in the first nine months, but since only 14% of its exports went to China its GDP had soared 8.8% year-on-year despite China’s lockdowns in part because exports to the U.S. and the EU, which accounted for nearly half of all exports, grew by 25% in the first nine months of the year.

Furthermore, most of Vietnam’s exports to (and imports from) China were of production inputs and/or other intermediate goods used in the manufacture of electronics and garments.

Some Vietnamese companies would benefit from China’s reopening, such as those that sell seafood and farm produce, but exports of products consumed by Chinese customers only accounted for around 5% of Vietnam’s total exports.

Foreign tourism had contributed about 10% of Vietnam’s GDP pre-COVID, and tourist arrivals were on track to reach 25% of pre-pandemic levels this year.

“We expect the number of foreign tourists will climb above 50% of pre-COVID levels in 2023 based on the assumption that Chinese tourist arrivals fully recover in the second half of next year,” the report added.

“However, the pace of recent developments in China points to a possible faster full resumption of Chinese tourist arrivals, which could lead to an even larger contribution to Vietnam’s GDP growth next year than we currently expect.

“We are aware of concerns some investors have that the reopening of China’s economy could detract from Vietnam’s appeal as a destination for foreign direct investment (FDI). We see no possibility of this happening given that China has irrevocably damaged its appeal as an investment destination for multinational firms, and U.S.-China trade tensions have dramatically escalated this year.”

Besides, there had been strong structural factors prompting FDI inflows to Vietnam even before U.S.-China trade tensions had emerged.

Factory wages in Vietnam were around two-thirds less than in China, but the quality of Vietnam’s workforce was comparable to that of China according to surveys by JETRO and others.

Also, Japan and South Korea, which accounted for over half of Vietnam’s FDI inflows, both faced serious demographic and intractable economic issues that compelled companies in both countries to invest abroad.