Vietnam: a coalmine canary caught in the Xi-Trump game

It doesn’t get any more geographically serendipitous than APEC holding this year’s summit in Vietnam.

For Donald Trump’s critics, it’s an irresistible chance to poke fun at his draft deferments – no fewer than five – during the Vietnam War. But Vietnam is arguably more on the frontlines of four of the biggest risks facing Asia – China’s growing assertiveness, America’s inward turn, the prevalence of boom-and-bust cycles, and governments prioritizing the quantity of economic growth over quality – than any of its peers.

As Asia-Pacific Economic Cooperation (APEC) forum leaders tackle these challenges on November 10 and 11, they should be looking through the lens of a host country that is grappling with a lopsided and uncertain global environment – an environment that’s complicating its quest for middle-income nationhood.

That will be hard, mind you. Asian summits have an inevitably airbrushed quality. Government prettification decrees hide tenement cities, hawker stalls, street kids selling water and flowers and adult-entertainment districts. A new road over here, a few coats of fresh paint over there, some creative lighting over that way and your city looks a bit more Singapore-esque for a few days. World leaders, taking in as much as one can from motorcades zooming at 150 kilometers per hour toward five-star hotels, come away pleasantly surprised.

There’s a similar dressing up of Vietnam’s financial system. On the surface, all’s grand. Vietnam is seen meeting its 6.7% gross domestic product growth this year. Odds are that it will remain one of Asia’s star performers as new factories open and foreign-direct investment surges its way. Behind the headlines, though, is a financial system that seems to crash every five years or so and a rigid political system that has been slow to raise its microeconomic game to match the macro story.

Bulls will point out that inflation could average just 4% this year. But if GDP growth is on the verge of exceeding China’s, exports and FDI are healthy and credit is surging at a 20% pace year-on-year, why in the world is the central bank cutting interest rates? It did just that in July, for the first time in three years. Why has Prime Minister Nguyen Xuan Phuc been prodding the State Bank of Vietnam to push banks’ lending rates even lower to boost business activity? Bubble, anyone?

This, of course, points to one of Asia’s aforementioned challenges, the boom-and-bust one. Vietnam’s communist politics, smokestack economy, dense population and rapid growth make it something of a “mini-China” – a parallel that’s probably causing many a sleepless night in Hanoi these days.

Behind the headlines is a financial system that seems to crash every five years or so and a rigid political system that has been slow to raise its microeconomic game to match the macro story

The other three challenges might seem less daunting if APEC or the Association of Southeast Asian Nations (ASEAN) had the institutional software or credibility to address them.

Take China’s assertiveness. Beijing’s Asian Infrastructure Investment Bank, Belt and Road Initiative and myriad other schemes don’t absolve its sins in the South China Sea. Hanoi’s politics has been whipsawed by Chinese President Xi Jinping’s ever-expanding territorial claims. China and Vietnam often seem like a fiery on-again, off-again romantic couple who have much in common, but suffer from deep mutual mistrust. As China throws its weight around to bring Vietnam to heel, it would be nice if APEC or ASEAN had Hanoi’s back. Hardly.

America’s inward turn under President Trump is also hitting Vietnam disproportionately. Washington reneging on the Trans-Pacific Partnership was a body blow to Hanoi’s trade-reliant model, and a reminder that Trump’s America is no more reliable than Xi’s China. Do APEC or ASEAN have an answer? Sadly, no.

TPP without the world’s biggest economy feeds into the last of Asia’s four big challenges – the quantity over quality debate. For Hanoi, joining then-US President Barack Obama’s deal was a means of shocking a closed and complacent financial system. TPP would force Hanoi to reduce subsidies for the dominant state sector and champion a vibrant and innovative private sector.

An APEC-wide or ASEAN-wide free-trade agreement could be just the thing. But between Xi’s regional ambitions and Trump’s ‘America First’ worldview, today’s dynamics aren’t great for promising smaller economies that want to be open. That makes Vietnam a fascinating canary in today’s economic coal mine.