The first victim of the China bubble might not be China. More likely it will be Vietnam, the communist cousin that has gotten in way over its head copying Chinese stimulus policies.
Hanoi responded to the global downturn in a similar way as Beijing: an enormous stimulus that promoted easy lending and further expansion of industrial capacity. The stimulus worked at first, producing 5.5% GDP growth rates and high stock market gains. But then it went awry.
Asia Times correspondent Shawn Crispin describes the swift deflation of the VN Index:
Financial analysts say that because there was virtually no underlying demand for working capital among state-owned enterprises (SOEs) and export-oriented private companies that received the bulk of the new credits, much of the money was recycled into the local stock market. The footloose liquidity contributed to making Vietnam’s stock market one of the world’s best performers during the first half of 2009; it then fell dramatically in the second half.
At the same time, Hanoi was unable to control inflation or shut down currency black markets:
The State Bank of Vietnam (SBV) has required that small banks, which contributed to inflation through rampant lending in 2008, triple their underlying capital by year’s end or face closure. The government has also ordered closed gold exchanges across the country – a restriction that will come into full force in March in a bid to stop local dumping of dong for gold.
China has dealt with these problems thanks to its powerful government and significant resource advantage. But there’s plenty cause for worry in Beijing. Not only does over-stimulation in Vietnam presage a similar crisis in China, but an economic collapse in Vietnam could destroy investor confidence throughout the region.