Why Vietnam is the new China

China is facing increasingly fierce competition from southeast Asia, says Leslie Norton in Barron’s. China’s export growth has slowed sharply in the past four years, from 31% to under 8%.

But Vietnam, Cambodia, Laos and Myanmar (Burma) have collectively grown foreign sales by an average of 20% over the same period. They are becoming “The New China”.

That’s down to costs. Chinese factory pay has risen by 14% a year in the past decade, making it less competitive.

A typical Chinese worker now gets $700 a month, compared to $250 in Vietnam and $130 in Cambodia. Bobby Bao of the Fidelity China Region Fund says that most of the firms he talks to, whose goods still mostly come from China, expect to source 30%-40% of them from Vietnam or Cambodia in a few years’ time.

Vietnam’s young, large and educated population – the literacy rate is 94% – also helps explain the export boom. Manufacturers can establish and run a factory relatively easily, says Tom Nelson of clothing group VF, owner of the Timberland brand.

No wonder, then, that exports are becoming increasingly sophisticated, a trend accelerated by tax breaks for high-end manufacturers.

Mobile phones have outstripped textiles as the main export, thanks to large investments from Samsung. Intel expects 80% of its computer chips to be manufactured in Vietnam by next year. “This is just the beginning of manufacturing growth in Vietnam,” says HSBC’s Trinh Nguyen.

The broader picture is also encouraging. “Vietnam has gone from a Third World backwater to ‘The New Asian Tiger’… in less than a decade,” says Daniel Veniez on Huffingtonpost.ca.

Once a Communist military dictatorship, it embarked on “an aggressive and sustained path to modernisation”. Growth has averaged an annual 7% in the past decade.

A lending binge-induced slowdown is slowly being overcome, with GDP growth expected to recover to 6.2% next year, up from 5.8% in 2014. The central bank has promised to accelerate its programme of purchasing bad debts from the banks in order to free up balance sheets for new lending.

Earlier this year, credit ratings agency Moody’s upgraded Vietnam’s debt, and rival Fitch did the same this month. PXP Vietnam Fund (LSE: VNF) and Vietnam Opportunity Fund (LSE: VOF) remain our favourite plays on Vietnam.

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