Despite the limited short term impact of growing tensions with China, Vietnam should accelerate economic reform to improve its competitiveness and reduce its dependence on its northern neighbor, according to the Hong Kong and Shanghai Banking Corporation Limited (HSBC).
Tourist arrivals from China will likely slow in June, and normalize in July, HSBC said in a report issued last week on Vietnam's macroeconomic situation.
Year-to-date, total tourist arrivals to Vietnam grew 26.1 percent.
Regarding FDI, worries remain over whether new investment will continue to flow in.
HSBC said that while Vietnam's FDI stock remains large (compared to its GDP) the percentage of foreign investment as a share of total investment is about 20 percent--most of which belongs to Japanese, Korean, American and Taiwanese investors.
While registered FDI from China into Vietnam has risen in recent years, its total stock is small and Vietnam's dependence on China is primarily a supply chain issue.
Core investors in Vietnam will stay put, HSBC predicted.
Few countries advance economically on foreign investment alone and domestic investment will have to become more efficient.
There are some signs that the Vietnamese government is making efforts to curb inefficient public investment and plans to begin focusing on economically vibrant areas of the country , HSBC said
Vietnam's exports to China made up 11 percent of its total exports in 2012. Raw commodities such as rubber, crude, coal and fruit remain key export items. While an important export partner, Vietnam’s trade relationship with China is stronger on the import side, as much of Vietnam's raw industrial materials come from China.
This is due to the fact that Vietnam primarily relies on cheap labor and fertile land to compete on the international market.
As a result, HSBC urged Vietnamese manufacturers to invest in localized inputs as well as improve their supply chain management to lessen dependence on China in order to meet the "yarn forward" tariff exemptions offered by the Trans-Pacific Partnership Agreement (TPP).
Specifically, the domestic garment and textile industry aims to reach a localization rate of 60 percent by 2015.
Vietnam's exports to China in 2013 topped $10 billion, while imports from the country reached some $30 billion, according to the Ministry of Industry and Trade.
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