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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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déjà vu   

2008-06-26 10:06:54|  分类: 默认分类 |  标签: |举报 |字号 订阅

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Déjà vu / 謝國忠

 

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Vietnam has descended from heaven to hell in a matter of weeks. Thechorus of praises still echoes in the fund raising circles: Asia'shidden dragon, the one in the China-plus-one strategy amongmultinationals, and the next China. Then, its stock market collapsedlike a house of cards. While its officially controlled exchange rate,the dong, remains stable, its 12month forward price in the offshoremarket is already 30% lower. Vietnam's crisis bears eerie resemblanceto the Thai bath crisis that heralded the Asian Financial Crisis in1998. Are we headed for another emerging market crisis?

Yes,we are entering another wave of emerging market crisis that seems tooccur every ten years. Several prominent economies may experiencecollapsing asset prices and weakening exchange rates. But, this wavewouldn't spread like wildfire like the one ten years ago. Emergingeconomies have been running over half a trillion dollars of tradesurpluses per annum (mainly attributable to China and oil exporters) incontrast to the aggregate deficits ten years ago. Dollar shortage wouldinflict only a few economies like Vietnam, India, or some East Europeaneconomies. Further, the economies with massive foreign exchangereserves could help those with dollar shortage. Hence, this wave ofcrises would be more limited in scope.

Vietnam'scrisis is self-inflicted. It didn't handle the hot money well andallowed it to supercharge its money supply. The resulting credit surgewent into stock and property speculation. Inflating asset pricesexaggerated the economic growth rate, which supported the hype behindthe hot money inflow. The resulting overheating triggered acceleratinginflation. As the government took action in early 2008 to rein ininflation, hot money began to flee. The resulting currency weaknessworsened inflation and forced further tightening. The virtuous cycleturns into a vicious one.

Most bubblesstart with a good story. Vietnam has averaged 7.5% GDP growth rate inthe past decade. Its poverty rate has been halved since 1993 to 24%.Since China began to appreciate its currency in 2005, Vietnam gainedextra attention as an alternative production base to China. To attractexport manufacturing businesses, Vietnam promised them to keep itsexchange rate low and pegged it to the US dollar. The policy did workwonders and attracted many businesses (mainly in garments, shoes, andfurniture) from Pearl River Delta. Even though Vietnam runs a largetrade deficit, it is largely financed by foreign direct investment('FDI'), i.e., its trade deficit or investment surge is FDI-led andself financing.

Its currency policy thenlaid the seed for today's trouble. Vietnam's economic successes beganto attract the attention of international capital. While Chinese retailinvestors view big international fund management houses with awe,thinking they have secret recipes for making money, they are actuallyrun by their marketing managers who sell funds rather than fundmanagers who invest money. The marketing managers want to sell fundsthat are hot and, hence, easy to sell. When a country gains prominencein international media, it is easy to sell funds in its name. But, itis exactly the wrong time to invest, as the media attention usuallymeans overvaluation. Hence, international capital, pushed by big fundmanagement houses, adds fuel to fire and amplify the economicoverheating. Vietnam is just the latest example in the long history of'from rags to riches and to rags again' for emerging markets.

Vietnamregistered 10% of GDP in current account deficit in 2007. There is nodoubt that it partly resulted from overheating. Excessive optimismdrove some of the investment growth. But, Vietnam does need investmentto build up its industry. Despite the hype over its export success, itremains a backward economy. Primary commodities like oil, rice, fish,and wood account for half of its exports. On value added basis, thesecommodities probably account for three quarters of its exports, asmanufacturing exports have value added of about 50% or less. Vietnam isstill a primary producer in global trade. As China's production costrises, it is a golden opportunity for Vietnam to repeat East Asia'sexport-led development success. Indeed, the total FDI last year wasquite close to its current account deficit, i.e., its imports wereprobably driven by foreign businesses.

Thecurrent account deficit didn't stop Vietnam's foreign exchange reservesfrom rising by $10 billion (or 12% of its GDP), mainly due to portfolioinvestment inflow, i.e., hot money. The money came from retail fundinvestors in Asia, Europe, and the United States. They heard aboutVietnam and, egged on by their brokers, bought into various Vietnamfunds. The inflow was going to push up Vietnam's currency value. Tomaintain its export competitiveness, Vietnam's central bought up theinflow to keep the currency from appreciating. It led to massive moneygrowth. The government didn't stop the money growth from turning intocredit growth. Bank lending rose by 50% in 2007 and above 60% in early2008.

Anytime you see massive creditgrowth, the chances are that the money is flowing into stock andproperty market, regardless of what government data say. Other economicactivities are not structured to absorb such rapid credit growth.Vietnam has set up 19 small joint stock banks. Of course, they wouldgrab any opportunity to expand at the expense of large state banks. Theeasiest areas to lend money into are for stock trading and propertydevelopment. The lending results in rising stock and property market.The rising asset prices increase the value of collaterals-land andstocks, which boosts lending.

Theoverheating led to high inflation. By the end of 2007, Vietnam couldn'tignore inflation on the ground that it was due to food and energy onlyand mostly imported. Inflation spread into all areas. In February 2008,the government acted with a package to cool demand, mainly bydownsizing government investments and issuing bonds to decreaseliquidity. The tightening, of course, led to diminished economic growthexpectation. The strong funds inflow on growth optimism began to leaveas growth outlook declined. The withdrawal of liquidity amplified thestock market decline that was already under way.

Afterrising by seven times in the previous three years, the stock marketindex began to dive in the fall of 2007, as the government restrictedlending for market speculation. The fleeing hot money turned thedecline into a total collapse. It has lost two thirds over the pastseven months. While tightening is the immediate trigger for assetdeflation, it was a bubble to begin with and would burst sooner orlater. The mistake is not tightening but tolerating the bubble for solong.

When a bubble bursts, it is difficultto maintain order regardless of how good policies are. By definition,bubble bursting is a disruptive even. It is too late to stop a painfuladjustment after a bubble has formed. It is just not possible to avoidpain after tolerating an asset bubble. Good policies, however, couldkeep the disruption short, say, less than one year. For example,China's tightening in 1994 restored stability relatively quickly.Korea's adjustment policy in 1998 brought the economy back in thefollowing year. Bad policies could throw a country into a prolongedturmoil. For example, Indonesia's turmoil after 1998 lasted for fiveyears.

Good policies must be internallyconsistent. There are two common mistakes that governments make intrying to restore macro stability: (1) fighting inflation withoutcooling demand and (2) depreciating currency to maintaincompetitiveness. Globalization has complicated inflation fighting, asmore and more factors that affect inflation are determined by worldmarkets rather than at home. Whatever excuses one may have, limitingmoney growth is a must for fighting inflation. Without some sort ofquantitative control of money supply during high inflation,stabilization policy is likely to fail.

InVietnam's situation, it must stabilize the deposit base and controlcredit growth. The former requires interest rate to be set aboveinflation rate. The surging demand for physical gold in Vietnam is adangerous sign that inflation expectation is high. As paper money isexchanged into gold, it boosts money velocity and, hence, inflation. Tostop this vicious dynamic of high inflation from taking hold, thegovernment must ensure that the value of bank deposits is protected.

Controllingcredit growth is the other side of the coin in stabilizing moneysupply. The government may have to set quotas for credit growth for thebanks. The targets should decline relatively quickly to low doubledigit growth rate from the peak of over sixty percent. As thegovernment restricts credit expansion, it has to eliminate manyinvestment projects. Probably, many buildings have to remainunfinished, similar to what China experienced after 1994.

Thebout of high inflation has eroded Vietnam's competitiveness. The marketis betting that it has to devalue to protect its export-led developmentstrategy and has priced in 30% devaluation in the forward market.Currency devaluation is not always bad. But, it doesn't work forVietnam. Devaluation works best when an economy has excess capacity.For example, Korea had massive overcapacity in heavy industries in 1998and devaluation played an important role in its economic recovery.Vietnam, however, hasn't built up its industrial capacity. Devaluationleads to more inflation, which then requires more devaluation tomaintain competitiveness. The vicious dynamic can plunge the countryinto prolonged instability. Vietnam's per capita income is below$1,000. There is plenty of scope to improve competitiveness viaimproving efficiency.

Vietnam should defendits currency as a core strategy for fighting inflation. It shouldobtain dollar liquidity lines from its neighbors and the internationalfinancial institutions like the IMF, World Bank, and Asian DevelopmentBank. If it can demonstrate a credible policy for currency stability,it would decrease demand for dollars and gold at home, which would coolinflation by slowing down money velocity. Of course, supporting thecurrency is not effective without controlling money supply andcurtailing investments.

Vietnam is quitesimilar to China in 1992-93. The country already possesses thenecessary elements for an economic takeoff. International investors seethe potential and pile in. The government has trouble controllingitself and tries to satisfy all the interest groups by toleratinginvestment projects and credit expansion. In 1992, China's monetaryexcess was due to rampant and voluntary money printing out of ignoranceabout its inflationary consequence. Hot money inflow was the mostimportant driver in Vietnam's monetary excess. The similarities betweenthe two are an optimistic and inexperienced government that wanted tolook from bright side whenever possible and tolerated excessive creditexpansion for too long.

Once its economystabilizes, Vietnam has a great future like China fifteen years ago. Ithas a good labor force and a pro-growth government. It needs to buildup its infrastructure and industrial base. It needs to be patient inbuilding up the economy, not trying to do everything at once. What isoccurring is a lesson to its government and its economic managementwould improve in the future due to the lesson learnt. Whileinternational capital is pulling out of the stock market en masse, itsmarket is probably worth investing now on low valuation. Of course, asforeign money continues to pull out, the market may sink further. Therecovery would take time like China's market in 1994.

Thecontagion effect of Vietnam's crisis has been limited so far. Dollarabundance among developing economies is the reason. In 1998, mostdeveloping economies had short-term dollar debts. Debt investors tendto run as soon as they feel uncertainty, as their upside is interestincome but the downside is losing principal. The contagion effect todaycould come from hot money in stock and property market pulling out.When one pulls money out of stock or property market, their pricesfall. Hence, the quicker the outflow, the less the outflow. Thisself-balancing dynamic makes the contagion less serious than ten yearsago.

Limited contagion effect doesn'tmean that the international community shouldn't help Vietnam. As aneighbor, China may have to assume a special responsibility. Any crisishas unpredictable consequences. Cambodia and Laos, for example, arevulnerable to what's going on in Vietnam. The stability of Indochina isimportant to China's Southwest. It is in China's interest to lend ahand. If Vietnam asks China for help, China should say yes.

Limitedcontagion doesn't mean that other emerging economies can carry on likebefore. What's affecting Vietnam is affecting others. The bottom lineis that, after years of fast monetary expansion, inflation is affectingeveryone. Almost all the developing economies need to limit demandgrowth to contain inflation. As many, if not most, emerging economieshave overvalued asset markets, containing inflation means assetdeflation, which is painful.

India hasbeen a superstar in the current growth cycle. Unlike the other three inthe BRIC group, it has trade and fiscal deficits. Hence, it isvulnerable to a turbulent adjustment like Vietnam. Its inflation mayclimb to double digit rate soon. Its social consequences could lead topolitical instability. The fiscal constraint may force the governmentto stop fuel subsidy. The resulting inflation surge may lead toinstability and frighten away hot money. As the massive amount of hotmoney flees its stock market, it could further destabilize the country.If India enters turbulent adjustment, it would have seriousconsequences through eroding confidence for emerging economies as awhole. So much of the faith in emerging economies comes from optimismover China and India. If one star dims, the optimism would come underthe severest test since 1998.

While we arenot witnessing a repeat of 1998, many emerging economies may encounterturbulence in 2008. Some may experience full blown crisis.


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