A look at recent economic developments in Vietnam and China
Economic development at present in the neighboring countries of China and Vietnam could not be more different. Vietnam's economy is booming, while China is facing new challenges. What investors can learn from the pace of economic growth in Asia.
Economic growth in Asia as exemplified by Vietnam and China
Stock exchanges are characterized by recurrent ups and downs. Vietnam's success story shows perfectly why the ascent of Asia remains a key topic nowadays. Vietnam is only at the start of developing its economic possibilities, but socioeconomic progress to date leaves no doubt that its economy has great potential. In stark contrast, China's recent stock market losses illustrate the extent to which the country is wrestling with internal and external conflicts.
Vietnam's economy is growing faster than those of its neighbors
With an average per capita GDP equating to CHF 2,600 per year, Vietnam is a small economy. But the country has had one of the five fastest growing economies in the world for 30 years. This means that the growth rate even exceeds that of higher income neighboring countries Malaysia, Thailand, and the Philippines.
Per capita economic performance of Asian countries
Last data point: 2020
Source: World Bank, The Economist
Like the phoenix from the ashes, Vietnam has freed itself from extreme poverty since the end of the 20-year trauma of war. One of the drivers of this change was the hope for a better life: poor conditions in the sport shoe and textile industry boosted the development of private enterprise. The main cause of Vietnam's rapid economic development is the boom in foreign investment.
Now, Vietnam has broken away from a sole focus on the textile industry, and has also made its mark as a global market leader in smartphone supply chains worldwide. Foreign trade plays a key role for the country.
Vietnam has set its sights on ambitious economic development
Low wages, a dynamic private sector, and its location in the South China Sea thus facilitated this growth in conjunction with the country's willingness to trade and openness to direct foreign investment. Such investments are increasing every year – but so is the requirement for high-quality products and services, particularly in the industrial and service sectors. And that's not all: The government's aim is for Vietnam to be a high-income country by 2045. This ambitious plan calls for annual economic growth of at least 5% for the next 24 years.
At present, inflation is low, the currency is stable, and public finances are healthy. In 2021, all three US-rating agencies – Moody's, Fitch, and S&P – upgraded the outlook for their BB rating for the government of Vietnam to positive. The Vietnamese stock exchange also seems to have faith in the potential of the domestic economy: With an increase of significantly more than 100% since the low point in March 2020, it is one of the most successful stock exchanges in the world.
Internal and external conflicts are impacting China's economic development
First, the one-child rule dating back to 1979 means that a growing proportion of the Chinese population will be leaving the labor market in the near future. This will lead to shrinking pension savings and a current account deficit. In view of this, the aim is to create a deep and broad capital market for strategic reasons. It is therefore no surprise that Chinese IPOs in the US have been punished in recent months.
Second, there is tangible evidence of Beijing's disciplinary measures for the private sector. This is because Chinese regulators have taken the long overdue step this year of tightening the regulations on balance sheet transparency and governance for IPOs. This led to delays with more than three dozen Chinese IPOs.
In addition, a large number of businesses, mostly technology companies, were targeted. Once again, motives connected with investor protection are being combined with those of domestic and social policy. This and the surprising protection of data and privacy is making investors skeptical. This raises the question of whether stricter standards apply to private companies than to government-related companies.
Nonetheless, Credit Suisse's view is that investors should remain invested in China. Although China's internal and external conflicts may be long-term in nature, the economy will continue to develop. For example, some of the companies participating in China's climate, water, or energy transition have posted spectacular profits since the start of the year. China's currency and banks have also been stable this year.
What investors can learn from the latest economic developments in Asia
1. Major economic developments often occur unnoticed.
2. Vietnam's economic development has great potential and the country's stock market is still narrow and small.
3. China is facing a major transformation: They want to make the economy more sustainable and the aim is for the country to move from being middle-income to high-income.
4. Both Vietnam and China will continue to grow. But this growth will not be the same as in the past.
5. An active and sustainable investment strategy, particularly in emerging markets, but also in remote markets, generally outperforms passive investments.
