Supply chains may be shifting to Vietnam: reports

TRADE tensions between the United States and China may have prompted supply chain shifts to Vietnam, with the latter seeing record investment approvals for projects from China and Hong Kong so far this year, said economists in separate reports in May.

In a May 27 note, DBS economist Irvin Seah noted strong foreign direct investment (FDI) flows from China and Hong Kong into Vietnam as a possible sign of regional supply chain reshuffling. In the first four months of this year, FDI from China and Hong Kong registered US$2 billion, "readily on pace to be the record highest annual outturn", he said. "This has outstripped investment from all the other major investors year-to-date, as well as the same period last year."

China's investments in Vietnam include sectors such as energy, construction, manufacturing, and property.

In a May 26 report, Citi economists Ang Kai Wei, Johanna Chua, and Kit Wei Zheng looked both at the official monthly investment approvals data as well as reports of 39 companies that had explicitly stated plans to shift production from China to Vietnam since January 2017.

They found that supply chain shifts so far have mainly taken the form of using or expanding existing facilities and adding capacity, instead of greenfield investment or acquisitions.

Other findings were that there has been greater interest from US companies in outsourcing to Vietnam, especially in sectors such as apparel and furniture; and that companies continued to plan for supply chain shifts even during April's 'trade truce', "highlighting their intent to diversify supply chains out of China against a backdrop of rising geostrategic competition between the US and China".

The Citi economists also cautioned: "For now, it remains unclear whether the cushion from supply chain shifts will be sufficient to offset the negative impact from trade war or a weak semiconductor recovery." Vietnam also has low domestic value-added in exports, with limited spillovers from FDI.

In a separate report, Citi's Ms Chua and Kim Jin-Wook also noted that Vietnam might be most at risk of being labelled a currency manipulator by the US as a pretext for trade tariffs. This follows a May 10 Bloomberg article citing unnamed US officials saying that the list for assessment will be expanded from the top 12 to top 20 trading partners, and that Vietnam might given such a label.

The Citi economists expect Vietnam, Malaysia, Singapore, and Thailand to be on the monitoring list, with Vietnam most at risk of being labelled, as it "arguably satisfies all three criteria" for currency manipulation. Nonetheless, Vietnam "seems to have dodged the bullet" for now as it recently provided new information to the US Treasury and sent its top envoy, they added.