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The Hanoitimes – New regulations shows that the SBV will reduce one-way intervention in the foreign exchange market.

The State Bank of Vietnam (SBV), the country’s central bank, has been working on measures to address the US’s tag of currency manipulation against Vietnam.

At the end of 2020, the SBV announced new regulations on buying foreign currencies from commercial banks. To be specific, from December 31, 2020, the SBV stopped listing spot bid-rates on USD/VND and stopped buying USD in the spot market.

From January 4, 2021, the SBV extended the USD forward contract term to 6-month instead of 3-month at the USD/VND rate of VND23,125. Besides, commercial banks are only allowed to cancel one-time the entire transaction value of the forward contract.

According to the VDSC, this move is considered as a first step to remove the currency manipulation designation by the US Treasury.

“By engaging more in forward arrangements, the SBV will be able to manage banking liquidity and intervene in the spot market without impacting headline official reserve,” noted the report.

In addition, the SBV could mitigate the risk of being labeled as a currency manipulation in the upcoming reports by the US Treasury as the 6-month term will help the SBV avoid the violation of the third criteria which requires the one-sided intervention in the foreign exchange market in six of the last twelve months.

Meanwhile, due to the substantial increase in foreign exchange (FX) reserves last year, reserves are sufficient in the context of the managed exchange rate regime based on IMF’s metric. Data from the SBV revealed the FX reserves reached approximately US$100 billion at the end of 2020, an increase of 26.5% year-on-year against early 2020 or US$21 billion.

Based on the most recent evaluation of the International Monetary Fund (IMF) in 2018, the VDSC estimated that Vietnam’s reserve coverage is currently at more than 100% of the adequacy metric, implying less pressure to accumulate reserves by the SBV.

Therefore, new regulations shows that the SBV will reduce one-way intervention in the foreign exchange market, stated the VDSC.

“In other words, regulators could allow a greater exchange rate flexibility in the medium and long-term thanks to sufficient FX reserves,” it added.

In response to the SBV’s announcement, the USD/VND exchange rate listed by commercial banks and listed in the unofficial market moved in opposite directions. Since the beginning of the year, the official exchange rate decreased by VND55-85 to the buy/sell level of VND22,950-23,160, but the unofficial exchange rate increased by VND50-170 to 23,400-23,450 VND.

In the short-term, as the SBV stopped buying USD in the spot market, the net FX position of many banks is highly positive, which could lead to an appreciation in the official exchange rate. On the other hand, the unofficial market might translate the change in FX intervention practices as a negative move, as a result, leading to a temporary increase in the unofficial exchange rate.

Rising trade surplus to put upward pressure on VND

In 2020, the real effective exchange rate (REER) depreciated by 5.8%, as the VND remained pegged to a weakening USD. However, based on the REER calculation, the VND is likely to remain overvalued using a CPI-based real board effective exchange rate index.

“An expected rise in the trade surplus and capital inflows in 2021 will put more upward pressure on the VND on the backdrop of a weakening USD,” stated the VDSC.

If the SBV targets to keep the exchange rate stable, regulators will still have to intervene in the foreign exchange market, it noted.

The VDSC suggested a bilateral talk between Vietnam and the US could prompt a change in currency intervention practices, instead of a change in the exchange rate regime. In addition, a modest nominal appreciation is appropriate to remove the currency manipulator tag set by the US Treasury Department.

Regarding to the ongoing investigation on Vietnam’s acts, policies, and practices related to the valuation of its currency initiated by the US Trade Representative (USTR), results of the recent public hearing were positive as 18/22 participants voiced their support for Vietnam. Most of them urged the US Treasury to refrain from imposing trade remedies and to choose bilateral negotiations in tackling concerns around the VND currency valuation.

The Hanoitimes – US’s decision to initiate a trade probe on Vietnamese goods could affect thousands of enterprises and millions of workers and customers from the two countries.

The Office of the US Trade Representative (USTR) has not considered any tariff action on Vietnamese goods and products.

Minister of Industry and Trade Tran Tuan Anh in a phone talk with US Trade Representative Robert Lighthizer.

US Trade Representative Robert Lighthizer gave the remarks in his phone talk with Vietnam’s Minister of Industry and Trade Tran Tuan Anh on January 7.

Mr. Lighthizer stressed that the office is still in the process of gathering information and data related to its investigation on Vietnam under Section 301 of the Trade Act of 1974 regarding currency undervaluation and wood products, adding no conclusion has been drawn so far.

The US Trade Representative highlighted the performance of the Vietnam – US Trade and Investment Framework Agreement (TIFA), as the platform has been instrumental for two sides to discuss and find solution to various economic and trade issues.

Minister of Industry and Trade Tran Tuan Anh expressed his deep concern that the USTR’s investigation could cause damage to bilateral relations and ongoing efforts to boost cooperation between the two countries.

“Thousands of enterprises and millions of workers and customers from both Vietnam and the US could be affected as a result of the investigation,” he noted.

Mr. Anh emphasized the Vietnamese Government’s stance of managing monetary policy to stabilize macro-economic conditions and control inflation, not to seek unfair trade gains.

“Vietnam’s recent purchases of foreign currencies are not aimed at devaluing the local currency, but building up the country’s foreign currency reserve that remains low compared to regional countries and to protect the national financial security,” stated Mr. Anh.

Meanwhile, Vietnam is committed to ensuring strict law compliance in the process of importing and using timber, added the Minister.

“Vietnam will continue to cooperate with US agencies during the investigation process,” added Mr. Anh, expecting the USTR to carry out the investigation in a transparent and fair manner.

In the meeting with the Ministry of Industry and Trade held in Hanoi on January 7, Prime Minister Nguyen Xuan Phuc also stressed that Vietnam gives priority to establishing a harmonized, sustainable and balanced trade relations with the US.

“The country stands firm in narrowing its trade surplus with the US, as well as the fight against trade frauds and illegal transshipment,” stated Mr. Phuc.

Mr. Phuc referred to his phone talk with US President Donald Trump last December as saying Vietnam is a developing country with limited economic capability, so that it is not its intention to seek gains in global trade from devaluing the currency, but to keep a stable economic environment.

Deputy Prime Minister cum Minister of Foreign Affairs Pham Binh Minh on January 6 also held a phone talk with US Foreign Secretary Mike Pompeo over the issue.

Mr. Minh said the Vietnamese government is committed to addressing comprehensively concern shared by both sides, targeting mutual benefits in trade for all parties involved.

The Hanoitimes – The two leaders agree that a strong bilateral relation will bring benefits to businesses and people of the two countries.

Prime Minister Nguyen Xuan Phuc yesterday [December 22] held a phone talk with US President Donald Trump over the bilateral relations, including recent investigation on Vietnam initiated by the US Trade Representative (USTR) under Section 301 of the Trade Act of 1974 regarding currency undervaluation and wood products.

Prime Minister Phuc during the talks. Photo: Quang Hieu.

The US Treasury Department on December 16 labeled Vietnam and Switzerland as currency manipulators, along with adding three new names, including Taiwan, Thailand and India in a watch list of countries and territories it suspects of deliberately devaluing their currencies against the dollar.

Others on the list include China, Japan, South Korea, Germany, Italy, Singapore and Malaysia.

Under its semi-annual currency manipulation report, the Treasury stated Vietnam had acted to gain “unfair competitive advantage in international trade as well.”

In the phone talk with Mr. Trump, the Vietnam PM said Vietnam is a developing country with limited economic capability. “The main objective in Vietnam’s monetary policy management is to control the inflation and stabilize macro-economic conditions, not for unfair gains in global trade,” Mr. Phuc stated.

“Vietnamese government agencies will continue to cooperate with the US counterparts to resolve issues of shared concern between the two countries, aiming to ensure a stabilized, balanced and sustainable trade relations for mutual benefits,” informed the Vietnam’s Ministry of Foreign Affairs (MoFA) in a statement.

Both leaders agreed that the Vietnam-US relations have been growing strongly in all spheres after 25 years of the establishment of diplomatic relations, and especially in recent years, while expressing strong belief that a stable bilateral relation will bring benefits to people of the two countries, with cooperation in trade and investment as one of the key pillars.

A strong, independent and prosperous Vietnam with growing influence in the region is the desire of the Vietnamese people and in line with US interests.

On this occasion, Mr. Phuc congratulated the US President on the successful development of two Covid-19 vaccines in a record time.

Mr. Trump added he loves Vietnam and its people, saying he looks forward to visiting the country again in a coming time.

The Hanoitimes – In case the US unilaterally accelerates the process of imposing more tariffs on Vietnamese exports, this will no doubt cause negative impacts not only on bilateral trading activities, but also the two countries’ relations.

Vietnam’s Ministry of Industry and Trade (MoIT) urged fair treatment from the US regarding its review process on Vietnamese currency policies and practices to avoid damaging the bilateral relations.

Any tariffs imposed by the US on Vietnamese goods would damage bilateral relations.

The MoIT statement came shortly after Reuters reported that the US government is likely to impose tariffs on Vietnamese goods in December after branding Vietnam as currency manipulator.

“Vietnam regrets the US Trade Representative (USTR)’s decision to launch  two investigations of Vietnam under Section 301 of the Trade Act of 1974 regarding currency undervaluation and wood products at a time when the two countries’ cooperation in foreign affairs, trade, and investment is growing strongly,” stated the MoIT.

Right after the USTR move was announced, the MoIT had announced its willingness to cooperate with US counterparts during its investigation process.

A Vietnamese taskforce led by the State Bank of Vietnam (SBV), the country’s central bank, is scheduled to hold a bilateral consultation with the US at the end of December.

“Communication at this period of time is essential,” noted the MoIT.

According to the MoIT, many business association, politicians and enterprises in the US have voiced their opposition against the USTR’s investigation and any potential tariffs on Vietnamese goods, which are damaging the interests of both countries, enterprises and people.

“In case the USTR unilaterally accelerates the process of imposing more tariffs on Vietnamese exports, this will no doubt cause negative impacts not only on bilateral trading activities, but also the two countries’ relation,” urged the MoIT.

The most affected from such decision are the two countries’ business communities, manufacturers and customers, it continued.

Vietnamese enterprises would feel unsafe when doing businesses with their US peers, which could lead to a decline in imports of input materials and technologies from the US and reverse the growing trend of increasing imports from the US  that has been going for a couple of years, stated the MoIT.

The Hanoitimes – The detail of the investigation is scheduled to be made public this week.

The Office of the US Trade Representative (USTR) last Friday announced its decision to initiate an investigation to determine whether an undervalued Vietnamese dong (VND) may cause negative impacts on US commerce.

Additionally, the USTR will also review Vietnam’s acts, policies, and practices related to the import and use of timber that is illegally harvested or traded. These probes are carried out at the direction of US President Donald Trump, it added.

Vietnam is currently in the US Department of Treasury’s monitoring list for currency manipulation.

“President Trump is firmly committed to combating unfair trade practices that harm America’s workers, businesses, farmers, and ranchers.  Using illegal timber in wood products exported to the US market harms the environment and is unfair to US workers and businesses who follow the rules by using legally harvested timber,” stated US Trade Representative Robert E. Lighthizer.

“In addition, unfair currency practices can harm US workers and businesses that compete with Vietnamese products that may be artificially lower-priced because of currency undervaluation.  We will carefully review the results of the investigation and determine what, if any, actions it may be appropriate to take,” he added.

USTR will issue two separate Federal Register notices this week that will provide details of the investigation.

Data from the General STatistics Office revealed Vietnam’s trade surplus with the US stood at US$37.74 billion in the first eight months of 2020, while the former has been one of the US top 10 biggest trading partners.

Vietnam is currently in the US Department of Treasury’s monitoring list for currency manipulation, which also includes China, Japan, South Korea, Germany, Italy, Ireland, Singapore, Malaysia and Switzerland.

In a report released early 2020, the US Treasury Department said Vietnam’s net purchases of foreign exchange were 0.8% over the four quarters through June 2019, adding the country’s reserves remained below standard adequacy metrics and there was a reasonable rationale for rebuilding reserves.

Further, while purchases of foreign exchange outweighed sales over the course of these four quarters, the SBV intervened in both directions, selling foreign exchange to resist downward pressure on the VND in the second half of 2018.

Vietnamese officials have several times affirmed that the country does not seek to manipulate its currency for unfair trade advantages.

As of end-August, the level of international reserves held by the State Bank of Vietnam (SBV) was equal to US$92 billion, up from US$80 billion at the end of December.