Navigating China’s economic slowdown

The National Bureau of Statistics of China reported that China’s consumer price index (CPI) edged up by 0.1% in August 2023 compared with one year earlier, easing previous deflationary pressure caused by the 0.3% fall in July’s CPI. However, many international analysts have voiced concerns that China's economic recovery journey will continue to face difficulties.

The current pressure on the Chinese economy stems from several factors, including the haggard state of the real estate market, rising unemployment among young people, and a significant decline in consumer spending.

These factors have led to a reduction in domestic demand, putting pressure on Chinese manufacturers to reduce prices and liquidate their excess inventory. This could create some opportunities for Vietnam as raw materials originating from China become cheaper, thus lowering the costs of producing goods.

However, it should be noted that the deflationary pressure in China could lead to a global deflationary trend, affecting consumer spending around the world. This can pose a big challenge for Vietnam, especially as it relies heavily on exports.

Furthermore, weakening domestic demand could lead to China increasing exports of finished goods. This poses a threat to Vietnamese industries that compete directly with Chinese suppliers in the global market. Risks are especially high for Vietnamese export industries such as textiles, electronics and furniture.

At the same time, the weakening of the Chinese economy could help reduce global inflation risks, creating opportunities for Vietnam to implement more flexible fiscal and monetary measures. In addition, changes in China’s economy could disrupt the global supply chain, opening up opportunities for Vietnam as international manufacturers look for new partners, including Vietnam, to respond to risks and optimise their production.

To cope with the negative impacts of China's economic fluctuations, diversification is still a top strategy. Businesses need to reduce their dependence on the Chinese market by urgently looking for alternative markets and diversifying their supply chains. This approach can be viewed as a "double hedge", protecting against both the short-term risks associated with China's economic slowdown and the long-term risks from imported deflation. The government can support this through incentives, creating favourable conditions for businesses to access raw materials from many other countries.

Second, in the context of lower demands both within Vietnam and from China, Vietnamese businesses need to focus on strengthening their share in the domestic market. They can use targeted marketing strategies or even expand into sectors less subject to deflationary pressures.

Third, Vietnam's growing trade deficit with China, reaching a record 60.2 billion USD in 2022 (up from 54.0 billion USD the previous year), requires the government to comprehensively review its trade and import policies.

A currency hedging strategy needs to be deployed to deal with fluctuations in the VND/CNY exchange rate, especially as currency values become more unpredictable.

Finally, businesses should also prepare for a deflation scenario right in Vietnam. This includes streamlining operations to maintain profitability, even as revenues are falling, and building up significant cash reserves to weather a possible economic downturn.

Story: Dr Bui Duy Tung, Lecturer in Economics, RMIT University Vietnam

Masthead image: Oleksandr Dibrova – stock.adobe.com