China, Vietnam, and the New Domino Theory

Written By Brian Hicks

Posted September 5, 2006

Though I doubt he’ll land on the roof of the Hanoi embassy, US Treasury Secretary Hank Paulson’s arrival in Vietnam this week is symbolic. Vietnam – vacated in bitterness by Marine helicopters three decades ago – is the newest staging ground for western capitalism.

Paulson is set to arrive in the Vietnamese capital on Wednesday for two days of meetings involving finance ministers from the countries that constitute APEC, the Asia-Pacific Economic Cooperation forum.

APEC’s twenty-one member states include China, the US, Canada, Vietnam, Singapore, and Australia. Altogether, the club accounts for more than 33% of the world’s population, 50% of the world’s GDP, and about 41% of total world trade.

But the most urgent statistic to Paulson’s mind should be 70%. That’s how many of Uncle Sam’s top ten trading partners belong to APEC. And one of them – China – has found the best recipe to take advantage of the capitalist system’s monetary ingredient.

As China’s currency appreciates, possibly hitting 7 yuan to the dollar within one year (down from more than 8 yuan per USD one year ago), it is more apparent to those who live in the real world that the ever-increasing trade imbalance between the US and China is not Beijing’s doing alone. US free-trade bulls and a bargain-crazed populace have served to paint stateside exports into a corner.

Even the Chinese are bracing for a drop in competitiveness as the yuan (also known as renminbi, or "people’s currency") floats more freely against a basket of international currency. With slim profit margins in the textile industry, for example, a 3% rise in monetary value could erase the Middle Kingdom’s clear competitive advantage.

So where will the cheap labor fall?

New Fashions, Old Trends

I recently bought a pair of shoes from the trend-pushing college favorite Urban Outfitters apparel chain. The blue and red Adidas are called "Boston Marathon," named after the famous footrace whose trotting models have marked many transitions in athletic science and fashion alike.

I lifted up the tongue of the shoe that in its original phase would have been German-made, and to my surprise the sole was laid in Vietnam.

Then, I looked around the store at other items – almost all assembled in the land of Ho Chi Minh!

Coupled with massive international investments in Asian and other companies by Chinese businessmen and financiers, the trend is clear – China’s "workbench of the world" status is in jeopardy. And the Chinese are fine with that. After all, the surging middle class in coastal cities and even the country’s interior wants its bread to be buttered through intellectual property and real estate, not sweltering sewing houses.

Foreign investment by Chinese companies rose by an astounding 123% in 2005, according to government figures released Tuesday. All the while China is still the top destination for foreign fund inflows.

As China struggles to keep its GDP growth in the single digits, raising the amount banks must keep in reserve and imposing restrictions to curb the overheating housing market, a favorite outlet is to pass the money downstream to regional countries where labor can serve as the basis for new, Chinese-style market systems.

After all, though western politicos often drop the "Communist" or "Red" tag from China’s name unless they are trying to make an ideological point, Mao’s face is still rather ubiquitous. As the Chairman graces Beijing banknotes, Ho Chi Minh smiles out from the Vietnamese dong, that country’s currency.

Industrial production is up 17% this year from the same period last year, meaning that more and more foreign lucre is being turned into dongs, and that money is churning within the Vietnamese economy in novel ways.

It’s not just sweatshops, either. Vietnam is engaged in an impressive strategy of foreign-domestic partnerships to learn the art of enterprise. The Vietnamese Bank for Foreign Trade has recently issued a debit card in cooperation with MTV Asia, to target youth saving clients.

It was recently announced that China is the world’s largest consumer of beer. If labor flows downstream from the Waking Dragon to the smaller emerging nations, so does the frothy brew.

Cadbury Schweppes, the beverage and treat powerhouse, is paired with Kinh Do to market its goods in the former French Indochina, and SAB Miller, the world’s biggest brewery, is allowing its hand to be guided by Vietnamese concern Vinamilk, in order to familiarize it with successful regional marketing approaches and tap increasing consumption all across Asia.

Marx Rolls in His Grave, Others Roll in Their Dough

On the official Web site of the Communist Party of Vietnam, one can read the tracts of the world’s great Red leaders – Marx, Lenin, Engels, Mao, and of course Ho Chi Minh himself.

One can also read the current Minister of Industry’s invitation to foreign and domestic companies to assist Vietnam in achieving 15% annual industrial growth for the next five years!

Minister Hoang Trung Hai has put the accent on oil and gas sector investment, saying some projects could allow 100% foreign involvement. The same goes for metallurgy, and heavy stakes will be given to outsiders in mining endeavors.

Meanwhile, Internet usage is growing rapidly. 17% of the population now use the Internet, up from just 7.69% at the end of 2004. International connection capacity has also been doubled, and education standards are growing at a remarkable rate.

Given the dual factors of industrial production and intellectual nourishment, Vietnam is well-equipped to show the world a new version of the Domino Theory in effect.


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