Investments in Vietnam

Written By Brian Hicks

Posted May 19, 2008

"Here you can really see Chinese socialism," my friend Wang told me.

He gestured with an open palm around us to the streets of Xining, the smallish capital of China’s northwestern Qinghai province.

"Chinese socialism, eh?" I thought, but I kept my lips tight.

"Would that be at the Adidas store or the KFC?"

China and Vietnam: From Marxist to Market

You can see it all over the Middle Kingdom—old government-run department stores with bare shelves and outdated styles have given way to western-style showcases of modern fashion and technology—often in the same building.

There’s something more jarring than the slew of reports about cranes all around and LCD TV screens advertising luxury to former peasants…

It’s hearing about the way things used to be, or seeing someone push rice away and eat only meat, because for generations rice was the only food available.

The point is that you can’t understand where a country is going without knowing where it’s been.

And in China, along with countries like Vietnam and North Korea that have varying relationships with Communism, the past carries through today and into tomorrow.

And it’s tomorrow’s opportunities that we’re looking for…

China’s Economy This Summer

China is dealing with potential triumph and real tragedy in this Olympic year.

Protests and the terrible natural disaster in Sichuan province last week are testing the nation’s command and relief networks, as well as its economic fortitude.

On Monday, May 19, officials in Beijing announced the staggering toll of last week’s 7.9-magnitude quake:

  • 71,000 dead, buried, or missing
  • 220,000 injured
  • 14,207 businesses seriously damaged

Direct economic losses are expected to total 67 billion yuan, or $9.6 billion.

On the other hand, the Beijing Olympics have created around 745,000 jobs and $40 billion is going towards revamping the capital city alone.

The Chinese economic pendulum swings hard from side to side.

There’s no better example than what happened in 1979, when President Deng Xiaoping uttered the key sentence to China’s generation of growth:

"To get rich is glorious."

The very fact that the government announced the economic toll of the earthquake—no such number has come out of Myanmar following Cyclone Nargis—shows us China’s change since Deng’s rule began, just years after Mao’s death.

Sure, China still has Five-Year Plans and other centralized national targets…

But the Five-Year Plan that runs through 2011, along with "Constructing a Harmonious Socialist Society," highlights the strengthening of service industries like tourism, environmental protection, and narrowing the growing gap between rich and poor.

These are economic goals any country in the World Trade Organization would assert, even though Mao still smiles gently from many rear-view mirrors and lapel pins.

China’s membership in the WTO itself, and its status as one of the world’s top economies with double-digit growth, makes it a model for other countries with socialist structures.

Tops among these may be neighboring Vietnam, where GDP growth hit 8.5% in 2008.

Vietnam Investments: Downstream from China

Both Vietnamese residents and outsiders are hoping for a repeat of China’s stellar stockmarket rise over the past couple of years—hopefully without the dizzying drop that halved the Shanghai Composite Index from October to April.

The Vietnamese government has already set up a secondary exchange in Hanoi to augment the trading floor in Ho Chi Minh (formerly Saigon). This mirrors what China did in Shenzhen to provide an alternative to the Shanghai bourse.

Now both Shenzhen and Shanghai are on the lips of millions of international investors.

Before those cities became targets for foreign investors, though, foreign manufacturers were moving to China in droves to take advantage of low-cost manufacturing.

So what’s happening now? Well, believe it or not, Chinese manufacturers are moving downstream to Vietnam to pad their margins!

Heavy inflation in China from record consumption of food, fuel, and consumer products give us a situation today where execs like Edward Kang of textile maker Ever-Glory International is heading down the Mekong.

Kang told Bloomberg that he’s moved 40% of his production base to Vietnam, where wages are about a third of today’s Chinese rates.

"The end of an era in terms of China’s mighty export industry has just begun," the entrepreneur opined.

So how do you get in on the ground floor of Vietnam’s market, which we have to assume is at the beginning of an era?

First, it’s important to note that Vietnam is a fraction of China’s size, economically and population-wise. There are some 85 million people in Vietnam compared to 1.3 billion in China.

And Vietnam isn’t immune to the same kind of inflation that China has suffered. Vietnamese inflation came in at 18.3% in 2007 but is expected to slow to around 10% in ’08.

Vietnam is the world’s second largest rice exporter, and with wild price swings we’ve seen in recent years, that export leadership will impact inflation, interest rates, and investment in the country.

So Vietnamese investment options are very limited right now…

Investments in Vietnam

Even a Vietnam exchange-traded fund still seems like a pipe dream, even though China is highly investible through Hong Kong and U.S. domestic listings.

There is BBV Vietnam S.E.A. Acquisition Corp., which is listed on the pink sheets as BBVUR, but it is headquartered in the Marshall Islands of the Pacific.

There is also the Vietnam Opportunity Fund (VTOPF), another over-the-counter pandora’s box that it’s better to stay away from.

So what’s the best Vietnam angle today?

As I say with many of these frontier markets that are difficult to play with direct stock purchases, you should dive into your portfolio for U.S.-listed companies that are doing early work on the ground to draw revenue.

The world’s leading mobile phone provider, Vodafone Group (NYSE:VOD) is a perfect example.

Vodafone, which we’re holding in the Global Growth Stocks portfolio, has opened offices in Hanoi and is bringing Vietnam into its worldwide expansion strategy, just as the company has done with many African countries, India, and even in the U.S. with its stake in Verizon Wireless.

Of course, we’re keeping an ear to the ground for pure plays on Vietnam to ride the wave up like we did with China, but I will say one thing very clearly: Each country has to be considered by itself through history, economic fundamentals, and goals.

Keep those individual elements in mind, and you will reap major profits in international investing.

Stay tuned,

Sam Hopkins

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