Vietnam, which heavily trades with China, will face greater trade deficit risks after the yuan was devalued, giving Chinese exports a significant competitive edge, economists said.
China's central bank on Thursday allowed its currency to drop against the dollar for a third straight day, although the devaluation was smaller than the ones seen earlier this week.
To boost China's export competitiveness on international markets, the People's Bank of China lowered the yuan by 2 percent on Tuesday, 1.6 percent on Wednesday and then 1.1 percent.
“This is a remarkable depreciation," said economist Le Dang Doanh.
"Previously, Chinese exports, for many reasons, were already cheap compared to those from other countries. The devaluation will make them even cheaper, raising their competitiveness in export markets, including Vietnam.
"That's what I'm really worried about," Doanh said.
China is Vietnam's top trading partner, but the world's second-largest economy benefits more from the partnership.
Vietnam exported $14.9 billion worth of goods to China, but spent $43.7 billion on importing products from the northern neighbor last year, according to the General Statistics Office.
Economist Vu Dinh Anh said local products would fail to compete against Chinese cheap products in the domestic market.
Meanwhile, Vietnamese producers would find it harder to export their products to China and other markets because of higher prices compared to similar products orginated from China, he said.
The yuan devaluation would make it more challenging for Vietnam to deal with its trade deficit that has remained large for many years, he said.
Economist Bui Kien Thanh said the currency devaluation was an expected move from China, whose growth has slowed down.
Last weekend, data showed an 8.3 percent drop in Chinese exports in July. The country's economic growth is set to hit a 25-year low even if it meets its official 7 percent target.
For many Vietnamese exporters, the weakening of the yuan came as bad news.
Director of a Hanoi-based garment company said foreign partners could force his firm to cut its export prices now that similar Chinese products have become cheaper. His firm mainly ships goods to Japan and the EU.
Economists say Vietnamese producers need to immediately improve their products’ competitiveness.
This problem should have been solved many years ago, but local enterprises have been "too passive in dealing with the issue," Thanh said.
He said in bilateral trade relations with China, Vietnam is the weaker one.
“Vietnam still imports too much from China, and exports too little. Its export and production capacity stands low.” he said. “Chinese products dominate the domestic market, while Vietnam doesn’t have many products to sell.”
Vietnam mainly exports to China raw minerals and agricultural products and food, with low values.
Exports to China account for 10 percent of Vietnam’s total exports, while imports from China make up around 30 percent of Vietnam's imports, in terms of value.
To protect its exports by countering the adverse affects of a strengthening dollar and a weakening yuan, Vietnam raised its trading band for interbank dollar/dong transactions on Wednesday.
Dollar/dong transactions can now move in a band of plus or minus 2 percent around a mid-point, which the central bank sets daily.
The mid-point has been held at 21,673 dong per dollar since May 7, when the State Bank of Vietnam devalued the dong by 1 percent for the second time this year. The May move met the government's promise to let the dong fall 2 percent this year.
Fluctuations in the forex markets and risks faced by enterprises from the yuan depreciation have hit Vietnam's stock market.
Vietnam's benchmark VN-Index has lost over 23 points since Tuesday, ending the week at 590.01.
Chairman of the State Securities Commission Vu Bang said the currency policy of China would have a huge impact on Vietnam’s economy and capital market, so local authorities should closely monitor market fluctuations to timely deal with them.
Sources involved in the Chinese policy-making process said powerful voices within government were pushing for the yuan to go even lower, suggesting pressure for an overall devaluation of almost 10 percent, according to Reuters.