Vietnam’s ‘Mini-China’ Days Are Numbered. It’s A Good Thing.

Vietnam has long been the closest thing Asia has to the economic equivalent of a pendulum.

Like clockwork, a place many like to think of as a “mini-China” stumbles spectacularly. One reason: investor sentiment on Vietnam tends to swing wildly from super bullish to super panicky about overheating markets. And at the moment, the pendulum seems to be swinging in the latter direction.

The 30% plunge in the benchmark VN Index so far this year is almost the mirror image of 2021’s 34% rally. And not to take the China comparison narrative too far, the drop really does echo the mainland’s property market chaos and government anti-graft campaign that’s spooking overseas investors and CEOs of multinational companies.

The frequency of boom-bust cycles afflicting Vietnam is a chronic problem standing in the way of raising per capita income. And it’s one government officials in Hanoi have never quite managed to fix.

Thing is, just about everyone believes Vietnam’s 98 million people are heading toward middle-income status on the way to greater prosperity in the decades ahead. First, though, Prime Minister Phạm Minh Chính’s government must reduce the amplitude of bullish-to-bearish swings in investor confidence.

It’s a bit disheartening, frankly, that this is where Vietnam finds itself in 2022, fully 36 years after the “Doi Moi” market-opening reforms began raising its economic game.

One central problem is the nation’s unhealthy preoccupation with exchange rates. For decades, the State Bank of Vietnam has aggressively managed the level of the dong. The rationale, of course, is that an export-driven economy maximizes performance by holding the currency as weak as possible.

In late 2020 this earned Hanoi a dubious honor no outwardly-facing economy wants: a spot on the U.S. Treasury Department’s “currency manipulator” list.

Of course, there was a silver lining in that decision by then-President Donald Trump. He was annoyed that factory jobs fleeing China were going to Vietnam rather than back to the U.S. In a sense, it was a backhanded acknowledgment that Trump’s trade war had backfired and that Hanoi was succeeding in luring more and more multinationals.

But foreign CEOs and investors will only stay for the long haul if Vietnam tames the wild sentiment swings. That requires policymakers getting under hood and internationalizing the micro-economy.

The first step is learning to live with a stronger currency. It would reduce overheating risks, increase confidence among investors and incentivize the private sector to become more competitive.

Though Japan and Vietnam have little in common, Tokyo is a cautionary tale of the dark side of maintaining an undervalued currency year after year. Since the late 1990s, Japanese governments have held the yen lower to the detriment of the economy’s ability to evolve. It reduced the urgency for the government recalibrating growth engines to keep up with China.

Twenty-five years of obsessive yen depreciation took the onus of Japan Inc. to restructure, innovate, raise productivity, modernize governance practices and take risks. Simply put, corporate welfare on such a massive scale deadened Japan’s animal spirits. Today, Japan trails Indonesia in the race for tech “unicorn” startups.

Vietnam wants to avoid this fate. It needs to stabilize a cratering property sector that’s dragging GDP lower and restraining wage growth. It needs to stop subsidizing an inefficient and often graft-ridden state sector. And more economic energy must come from the ground up, not the top down.

It’s time Hanoi pivoted away from the model that earned it the mini-China label. Rapid growth, communist politics, a factory-heavy job market, a sizable population, low costs and enviable geographical placement got it this far. But leapfrogging $3,700 per capita now to, say, $10,000 requires a new game plan.

By winning Trump’s trade war and having a comparatively successful Covid-19 experience, Vietnam proved it can succeed in the worst of conditions. As the Wall Street Journal reported earlier this month, Apple lists Vietnam among its top candidates for China alternatives to manufacture iPhones, along with India.

Yet the year ahead could be a uniquely chaotic one. Between China’s sudden pivot away from “Zero Covid” lockdowns, fears of a U.S. recession and central bank rate hikes, Vietnam could find itself in harm’s way early and often.

Taking a longer-term view, though, this pendulum dynamic is self-defeating, and increasingly so. It’s high time the economic swinging stopped.