Background

As most of us would have know, the US-China trade war started in 2018 when Donald Trump was the president of the United States. The US has accused China of unfair trading practices, including intellectual property theft, forced technology transfer, lack of market access for American companies in China and creating an unlevel playing field through state subsidies of Chinese companies. China, meanwhile, believes the US is trying to restrict its rise as a global economic power.

This event has caused a big disruption to the global supply chain and stock markets in recent years. The latest event being Didi delisting themselves from the US stock market. Moving into 2022, I believe this relationship remains a key risks to global markets.

Big Companies Exiting China

However, as always, opportunities can be aplenty if we look deeper into the US-china situation. Many companies have shifted their operations outside China. A staggering 76% of US companies with factories in China were in the process of or considering moving operations to other countries in 2020. One such company is Nike, whose suppliers are relocating production facilities for some time now, and the company reviewed its supply chains in Xinjiang too following stories of the mistreatment of Muslim Uyghurs in the region. 

Some of the key reasons that companies cited for the move is to avoid the heavy US tariffs on products produced in the China for the US market and production diversification (reducing production dependence on China).

Tech giant Apple has been pushing its suppliers like Foxconn, Delta Electronics and Petagron to move up to 30% of iPhone production from China. As a result, Foxconn invested $1 billion to expand its plant in India, while the rest are setting up in Vietnam, Thailand and Indonesia. The Airpods and iPads are expected to be produced in Vietnam instead of China as well going forward. Of course, we know that the pandemic has slowed down Apple’s transition into Vietnam in the last 2 years.

South Korea’s Samsung Electronics shut its remaining smartphone factory in China in 2019. Further closures were announced with Samsung ceasing production at its last PC plant in China in August, instead moving operations to Vietnam, and the company also shuttered its only TV factory in the country last November.

Fellow South Korean firm LG Electronics has followed in the footsteps of Samsung and relocated the manufacturing of some of its products from China. In an effort to avert hefty US tariffs, the company shifted all production of refrigerators bound for the American market from China’s Zhejiang province to South Korea. 

Almost a quarter of German companies operating in China were planning to relocate production from the country in 2019, according to a report by the German Chamber of Commerce in China. For example, Adidas has halved its Chinese manufacturing since 2010, with much of the production moving to Vietnam, and pledged in July last year to cut all ties with suppliers implicated in a report that uncovered forced labour being used in some factories. Like Apple, Adidas also felt the impacts of Vietnam’s rising COVID-19 infection rate, which has stalled production since mid-July and is expected to cause losses of up to $600 million (£431m) during the latter half of 2021. 

Adidas’ German arch-rival Puma is shifting production away from China as well. The company, which makes more than a quarter of its products in the People’s Republic, is keen to diversify its manufacturing base and supply chains, not to mention avoid US tariffs by producing more of its running shoes, sportswear and other products in Bangladesh, Cambodia, Indonesia and Vietnam.

In a bid to reduce the country’s reliance on China, the Japanese government set aside 243.5 billion yen ($2.2bn/£1.7bn) in April last year in order to incentivise domestic companies to pivot production away from the People’s Republic and into Japan and southeast Asia. Among the 87 firms that benefitted from state subsidies is world-renowned consumer electronics company Sharp, which is majority-owned by Taiwan’s Foxconn.

American firm Hasbro moved a significant proportion of its production out of China to factories in Vietnam and India. Amid the ongoing US-China trade war, the world’s number one publicly-listed toymaker expected to produce around half of goods destined for the American market in China by the end of 2020, down from just under two-thirds in 2019. Despite lower levels of production in China, importing goods is causing havoc for Hasbro as the company is one of many suffering from the global shipping container shortage that is preventing goods from being transported from China to the US.

Hyundai Motor Group, has also taken steps to shift manufacturing away from China and closed its Beijing plant in May 2019. While production in China has dropped, the firm is boosting manufacturing of its vehicles in India.

As supply chains have become disrupted, the tech behemoth Alphabet has moved manufacturing of its flagship Pixel smartphone to Vietnam and will reportedly produce various smart home products in Thailand rather than the People’s Republic, while production of its Cloud motherboards and Nest products has relocated to Taiwan and Malaysia. Shifting production away from China has been a longer process than hoped though because of outbreaks of COVID-19 in countries such as Vietnam.

After moving production of its Surface line of notebooks and desktop PCs from the US to China in 2017, reports also suggested Microsoft was planning to move production to north Vietnam during 2020. The US tech titan has been tight-lipped about the news, but the move is thought to have been fast-tracked because of COVID-19.

Though Intel remains confident in the Chinese economy and is strongly committed to operating in the country, the Silicon Valley-based semiconductor chipmaker has followed many US companies by shifting the manufacturing and assembly of some of its wares from the People’s Republic to Vietnam. 

Sony closed its smartphone plant in Beijing in 2019 and moved production to a factory near Bangkok, Thailand. However, the Japanese tech company was at pains to stress that the move was prompted by disappointing sales and rising costs in China rather than the US-China trade conflict. Sony also opted to move its regional executives from Hong Kong to Singapore in July last year.

In 2019, Nintendo moved some production of its Switch console from China to Vietnam but, like Sony, the Japanese video games company said the move has nothing to do with the US-China trade war and was more about diversifying its manufacturing options and avoiding putting all its eggs in one basket.

In light of the US-China trade War, American sportswear and casual apparel company Under Armour has mapped out a plan to reduce its reliance on manufacturing in China in favour of countries such as Vietnam, Jordan, the Philippines and Indonesia. The company is aiming to source just 7% of its products from China by 2023, down from 18% in 2018.

Steve Madden shoes and handbags will no longer be produced in China. The New York-based fashion company was hit by Trump administration-imposed tariffs and plans to gradually move production of its footwear and accessories to Cambodia, Brazil, Mexico and Vietnam in order to keep costs for its US customers on an even keel. After suspending the process because of the pandemic, Steve Madden had scheduled to start shifting production away from China earlier this year.

Vietnam – A beneficiary of the Trade War

As we have read above, a number of global companies have shifted their production/ operations to Vietnam. It is very clear that the country will benefit from the US-China trade tension, and this trend has just started.

The US and China remain the top two trading partners of Vietnam with value amounting to $125.95B in the year 2020 alone. Electrical and electronic equipment constituted a majority of these exports (refer to chart below). As such, their economic growth will depend heavily on the US and China Markets.

Vietnam Exports By Category
Vietnam Exports By Category

Vietnam – Foreign Direct Investment

Vietnam Foreign Direct Investment by Industry

We can see from the above table that a big chunk of FDI is concentrated in manufacturing and processing sectors which aligns well with the macro views shared earlier. While FDI inflows decreased because of the COVID-19 shock, they have proven resilient compared to the rest of the world, suggesting continued confidence in Vietnam’s economic potential. In the first half of 2021, total FDI commitments contracted by 2.6% (y/y), reaching US$15.3 billion. Yet, the level of commitment declined by 45% between April and June, which may indicate further prudence by foreign investors amidst the recent COVID-19 outbreak.

Source: World Bank

The above chart shows net inflows of Vietnam’s FDI increasing steadily over the years.

Source: World Bank

Vietnam’s GDP started climbing around the year 2005 and have shown a steady increase over the years.

Vietnam and the Pandemic

Like all global economies, Vietnam was not spared when Covid strike in 2020. The country experienced its first quarter-on-quarter decline of its GDP since 2000 for the July-September 2021 period. The economy slid into negative territory during the third quarter after 6.57% growth in the previous three months according to the country’s General Statistics Office. Exports continued to drive the economy, growing 5.2% in the third quarter. However, the rise was hampered by strict isolation measures in southern Vietnam, particularly Ho Chi Minh City. The curbs have left workers sleeping at factories or in designated lodgings, slashing production capacity.

Labor-intensive industries involving sewing or wire harnesses are particularly affected. Disruptions in Vietnam’s supply chain have led to production cuts by Toyota Motor and other Asia-based automakers.

The pandemic has accelerated the shift of exports from primary and resource-based to high-tech products. Social distancing measures and work-from-home practices caused by the pandemic also contributed to shifting the demand for exports from traditional, low-technology products to those with more advanced technology. Demand was particularly strong for computers, electronics, phones, and machinery, whose exports to the United States grew by 57% in 2020 and 62% (y/y) in the first four months of 2021, accounting for over 40% of Vietnam’s total export to this market. Foreign-owned firms, which dominate the export of high-tech products, have contributed to and benefited from this shift in the composition of exports. These firms’ exports grew by 10.7% in 2020 and 3% (y/y) in the first half of 2021. The United States, China, and the European Union continue to remain the main markets for Vietnamese exports, with the United States buying an increasing share of these exports.

Recent patterns in exports,
by product
Recent patterns in exports,
by destination

In September 2021, the Asian Development Bank lowered its 2021 growth forecast for Vietnam to 3.8% from 6.7% in April. Standard Chartered also downgraded its 2021 forecast to 4.7% from 6.5%. The Ministry of Planning and Investment on Sept. 14 cut its GDP growth forecast to a range of 3.5% to 4% this year.

Vietnam Benefiting from the US-China Trade Tension

Prior to the trade war in 2018, GDP growth of the country has always been around 6% thereabout. In the year 2018, the GDP growth hit 7.1% annually and in 2019, it was 7.0% until the country was disrupted by the Covid crisis.

Vietnam’s economy has a strong agrarian base, with key agricultural exports of wet rice, coffee, and black pepper. However, in the past decade (2008 to 2018), agriculture’s contribution to Vietnam’s GDP has been decreasing while the country’s industry sector experienced rapid growth at the same time. As of 2018, Vietnam’s top exports include information technology hardware, such as broadcasting equipment and mobile devices.

A young, working population

About 69% of Vietnam’s 94 million inhabitants are part of the workforce, or between 15 to 64 years. The country’s workforce has a low unemployment rate of around 1.8%, and it is considered a strong regional economic leader, with a yearly economic growth rate of between 6% and 7%.

Vietnam’s optimistic future

Vietnam: Growth rate of real gross domestic product (GDP) from 2016 to 2026*

As indicated by the positive growth rate of its real GDP, Vietnam’s economy is expanding due to growth in exports, domestic demand, and the manufacturing sector. As the economy expands, so does the total expenditure of Vietnamese consumers. The average monthly income per capita in Vietnam increased to almost 3.8 percent in 2018, and is spent on fast moving consumer goods from popular brands like Vinamilk.

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GDP per Capita (Vietnam)
Source: World Bank
Private consumption expenditure in Vietnam from 2013 to 2020 (in billion U.S. dollars)

In 2020, Vietnam’s private consumption expenditure amounted to over 185.37 billion U.S. dollars. Together with positive GDP growth, the private consumption expenditure in Vietnam had been increasing steadily in the observed timeline.

GDP Growth Forecast

Vietnam: Gross domestic product (GDP) in current prices from 1986 to 2026

Vietnam proposed a five-year economic plan targeting growth of 6.5% to 7% for 2021-25, aiming to boost per-capita GDP to $4,700 from this year’s estimate of $2,750.

Selected economic indicators, Vietnam, 2019–23

The Vietnamese economy is expected to expand by around 4.8% in 2021 and converge toward the pre-pandemic GDP growth rate of 6.5% to 7% from 2022 onward. This forecast is a downward revision of the projected 6.8% for 2021 in the previous “Taking Stock” report released in December 2020 and is subject to further risks to the downside. It is also lower than the official projection of a GDP growth rate of 6% in 2021.

This downward revision of the GDP growth rate in 2021 takes account of the latest outbreak that is expected to negatively affect the economy. It assumes, however, that the current outbreak will be gradually brought under control, allowing the economy to rebound in the fourth quarter. This rebound will also be supported by an acceleration of the vaccination program, preventing new severe outbreaks. Any modification in these assumptions will of course affect the predictions.

Vietnam’s Vaccination Rate

International experience has demonstrated that a country’s economic growth is closely correlated with the intensity of mobility restrictive measures and the vaccination rate among the population. A recent International Monetary Fund analysis suggests that for every month of lockdown, industrial output is expected to be reduced by approximately 10 percent. Such a correlation was observed in Vietnam during the national lockdown in April 2020, when both industrial production and retail sales declined abruptly. As the number of vaccinated individuals increase in the country, I am expecting output to return to normalcy, though at a slower pace in view of the latest Omicron variant globally.

Vietnam’s Labour Force and Income Changes

Labor force participation rate, Unemployment and underemployment rates

Income relative to a year ago has improved though lingering effects of the pandemic on households were visible even before the April COVID-19 outbreak and have likely intensified in recent month. As of March 2021, 30% of households were still earning less than in March 2020, down from about 50% in January 2021. Around 12% of these households were in financial distress as they reported to have lost at least 50% of their income.

Vietnam’s Fiscal and Monetary Policies

Fiscal and monetary policies will remain supportive through the recovery in 2021. As the economy emerges from the fourth outbreak, fiscal policy will support aggregate domestic demand through selective measures and by accelerating public investment disbursements. The fiscal balance and debt-to- GDP ratio are expected to deteriorate slightly in 2021. The second business and household support package is modest but, if implemented, will cost about 0.4% of GDP. Acceleration of investment disbursement is expected to remain within budget, however. Monetary policy will remain accommodative to support the business community. Inflation will remain subdued.

As the growth dynamics firm up, monetary policy will revert to a neutral stance starting in 2022. As the domestic economy recovers, monetary policy will unwind its accommodative policies, focusing more on the objective of stabilizing inflation. Inflation is expected to remain below the 4% policy rate set by the SBV. Increases in administrative prices and natural shocks to the food supply could lead to short-term price increases in food and specific services or utilities, but those are not expected to fundamentally change the dynamics of price expectations in the next few years. The authorities will need to carefully monitor the rise of nonperforming loans to ensure financial sector health and push for the adoption of Basle II capital rules for all operating banks.

The government will resume fiscal consolidation in the coming years. The fiscal deficit should decrease gradually from 6.0% of GDP in 2021 to 5.9% in 2022 and 5.4% in 2023, paving the way for a sustainable debt trajectory in the medium to longer term. To ensure that fiscal consolidation does not affect growth potential in the medium term, domestic revenues should be improved through administrative reforms that enhance efficiency of collection and be used to finance infrastructure and quality social services that will help the economy become more sustainable and digitally transformed and productive.

Key Risks

Vietnam’s economic prospects will depend on several factors: (i) the pace of national vaccinations; (ii) the evolution of the pandemic, and thus resumption of economic activities in countries that compete with Vietnam in export markets; and (iii) weaker-than-expected growth especially in Vietnam’s key export markets could weigh on the recovery.

The recovery in the United States, the European Union, and China is underway but fragile. If one or more of these risks were to materialize, exports and domestic demand would not rebound as expected. The economy could still grow by 3.2% in 2021 and 5.5% in 2022 (low case scenario). Inflation will remain subdued, but the country’s fiscal and external balances will not improve as projected in the baseline scenario from 2021 onward.

Labour participation has not fully recovered to the pre-COVID-19 period and household incomes have been affected. Lower household income would in turn affect consumption and investment decisions, and by extension, economic recovery. Lower income may also impact investment in children’s education and health, which would have long-term effects on the country’s human capital formation.

Nonperforming loans (NPLs) reported by credit institutions and average capital adequacy ratio (CAR)

Given the Delta variant outbreak in May this year, many companies have closed down and therefore, there was an increase in the number of non-performing loans (NPL). This has created risks in the banking sector and authorities will need to keep a close watch on the level of NPL in the country. Vietnam still has a number of under-capitalised banks and any failures in the monitoring of NPL could easily spark a a financial crisis due to the failure of its banking sector.

Vietnam’s trade deficit with China has grown rapidly since 2001. Its heavy dependence on Chinese intermediate and capital goods creates vulnerabilities in its entire production chain. Vietnam may need to seek alternative nations for trading to mitigate this risk. Vietnam, has over the past few years, signed a number of new-generation free trade agreements (FTAs), including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which excludes China, and the European Union-Vietnam Free Trade Agreement (EVFTA). In the meantime, Vietnam will need to take proactive measures to increase the utilization rate of these agreements and push forward economic and institutional reforms to strengthen its overall economic resilience. If Vietnam is successful in these efforts, its trade reliance on China, which is likely to persist in the short to medium term, will be less of a concern.

Tapping on this growth story of Vietnam

Investors can utilise both Unit Trusts or ETFs to tap on the potential growth of the Vietnamese market, though the choices are very limited.

Lion Global Vietnam SGD

For unit trust, we have the Lion Global Vietnam SGD which is a 100% equity fund allocated to Vietnam. Fund size is relatively small at S$191.5 million. As of 30th June 2021, the fund has a total of 22 companies in its portfolio. The fund was launched in the year 2015 and has a 3-year sharpe ratio of 0.92.

Fund Historical Performance

As the fund is narrowly focused (only Vietnam), with only 22 holdings as at 30th of June 2021, investors should NOT be looking at allocating anything more than 10% of their entire investment portfolio.

VanEck Vectors Vietnam ETF (VNM)

This ETF is traded in the US and dedicated to the Vietnamese equity market. Issuer of this ETF is VanEck and has a fund size of US$566.36 million as of 23rd of December 2021. The ETF has an annual yield of 0.34% and has a 3-year sharpe ratio of 0.47. The fund tracks the MVIS Vietnam Index, which reflects the performance of the largest and most liquid companies that operate in Vietnam. VNM is a multi-cap ETF that invests in equities of various market capitalizations. Like its index, it includes companies that are both domiciled in Vietnam and elsewhere, but which generate at least 50% of their revenue from Vietnam. More than three quarters of the fund’s holdings are of companies domiciled in Vietnam. Companies based in Taiwan, South Korea, Japan, and China are also represented. Real estate has the largest sector weighting in the fund, followed by consumer staples, financials, consumer discretionary, and industrials. VNM follows a blended strategy, investing in both growth and value stocks.

Again, based on the fact that the ETF is very narrowly focused, investors should NOT be allocating more than 10% of their portfolio into this ETF.