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The study objective is the examination of the impact of USD / CNY exchange rate on macroeconomic factors by evaluating the specific effects of the USD / CNY exchange on economic growth, inflation and currency in Vietnam. Based on the results, the study will propose some recommendations in the exchange rate policy management in order to mitigate the negative effects of exchange rate fluctuations, then contribute to Vietnamese economic objectives.
MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY LE THI THUY HANG THE IMPACT OF CNY/USD EXCHANGE RATE TO VIETNAMESE MACROECONOMIC FACTORS THESIS SUMMARY Major: Finance - Banking Code: 62.34.02.01 Supervisor: Assoc Prof Le Phan Thi Dieu Thao April 2018, Ho Chi Minh city CHAPTER 1: INTRODUCTION 1.1 RESEARCH ARGUMENTS Many experimental studies in the world (Kinnon, 2003; Ibrahim, 2007 ) have shown that exchange rate fluctuations of the third currency will affect the economies of other countries The closer trading relationship of countries in the same region are, the more effectible exchange rate fluctuations does In fact, China is Vietnam's neighbor as well as the largest trading partner of Vietnam with steadily increasing trade surplus to Vietnam With China's growing economic and political power, CNY is increasing its influence in the world While Vietnam is still using the semifloating exchange rate regime on USD as East Asian countries Thus it is necessary to consider the impact of the USD/CNY on Vietnamese macroeconomic factors That is a reason why the author selected the research topic "Impact of the RMB and US Dollar exchange rate on the macroeconomic factors of Vietnam" 1.2 RESEARCH OBJECTIVES The study objective is the examination of the impact of USD / CNY exchange rate on macroeconomic factors by evaluating the specific effects of the USD / CNY exchange on economic growth, inflation and currency in Vietnam Based on the results, the study will propose some recommendations in the exchange rate policy management in order to mitigate the negative effects of exchange rate fluctuations, then contribute to Vietnamese economic objectives To achieve this goal, the study should answer the following questions: (1) How long does the USD / VND exchange rate affect the macroeconomic factors of Vietnam including the short and long term? (2) Is the relation between USD / VND exchange rate and USD / CNY exchange rate a causal relation? (3) How does the USD / CNY exchange rate impact on macroeconomic factors in short-term and long-term and what is its level? 1.3 OBJECT, SCOPE, AND METHODOLOGY The study focused on the impact of the USD / CNY on macroeconomic factors in Vietnam, including the GDP index as representing economic growth, CPI is proxy for inflation and the money supply M2, the interest rate acts as the currency Data is collected quarterly from the first quarter of 2000 to the first quarter of 2017 Trang The research use VAR model to evaluate the impact of USD / VND exchange rate to the macroeconomic factors of Vietnam to answer the question (1) the combined study of exchange rate policy analysis in Vietnam Then, in response to question (2) the study conducted an analysis of the CNY international process, the effect of CNY on other currencies, VECM model is used to examine the causal relationship between the exchange rate USD / VND and USD / CNY exchange rate Finally, based on the results obtained in questions (1) and (2), combining with using SVAR model to analyzes the relationship between Vietnam and China to resolve question (3) 1.4 RESEARCH RESULTS This research contributes to the following new points: (1) Scientific mean – contributing to theorical part of research: The study has contributed to use basis theories of exchange rate and macroeconomic to experiments in Vietnam, where has many arguments about its economy market mechanism While most researches in the world apply theoretical foundations to developed countries or well-structured market economy countries, the study chose Vietnam as a sample to illuminate the application of those scientific foundations to other economies that have similar economy structures with Vietnam From that, the results will be tested to define that they are consistent with theories and previous experimental studies (2) Practical mean – contributing to emperical studies: Current researches in Vietnam analyze the exchange rate pass-through channel and the individual relationship between factors such as exchange rate and interest rate, or exchange rate and growth, or exchange rate and inflation …etc This study examines the impact of exchange rates on macroeconomic factors by using commodity market and money market in the same study to provide a comprehensive view This is a new point from other previous studies in Vietnam In contrast to studies in the world (Kinnon, 2003; Ibrahim 2007), this study has been done in a volatile and integration reality environment, where capital inflows are liberalized vigorously; high-fluctuation exchange rate; and up-down trends economy in recent times The recent researches mainly deal with exchange rate policy of Vietnam and China, they only analyze the actual situations, while the impact of the exchange rate is not quantified specifically This study examines the practical situation and applies econometric models to Trang quantify the impact of exchange rates on macroeconomic factors, which are the basis suggestions for policy management 1.5 RESEARCH STRUCTURE There is chapters in thesis as follows: Chapter 1: Introduction Chapter 2: Literature Review and Experimental Studies Chapter 3: The Impact of USD / VND exchange rate on macroeconomic factors of Vietnam Chapter 4: The Relationship between USD / VND exchange rate and USD / CNY exchange rate Chapter 5: The Impact of USD / CNY on macroeconomic factors in Vietnam Chapter 6: Research Results and Recommendations CHAPTER 2: LITERATURE REVIEW AND EMPIRICAL RESEARCHES 2.1 LITERATURE REVIEW 2.1.1 Exchange rate The nominal exchange rate (NER) between two currencies is defined as the price of a currency expressed in the number of other currencies The real exchange rate (RER) is commonly defined as the nominal exchange rate is adjusted by the differences price level or price level of traded goods and non-traded goods 2.1.2 Macroeconomic factors Economic growth is defined as an increase in the size of economic growth in a given period of time, creating the resources needed to improve the living conditions of the population To measure economic growth, the research used gross domestic product (GDP) growth, which is the value of all final goods and services produced nationally in a given period of time Trang Inflation is the phenomenon of commodity prices rising by comparing with price level in the past Consumer price index is used to assess the inflation of the economy, which is defined as an indicator to reflect the relative change in consumer prices over time Beside the two economic factors, countries also consider other macroeconomic factors on monetary: Money supply refers to the supply of money in the economy in order to meet the demand for the purchase of goods, services, assets, etc by entities (excluding credit institutions) The money supply in circulation is divided into sections: M1; M2; M3 Interest rate is the cost needed to get the funds to use in a certain period of time The mobilizing rate is the amount of money pays to depositors by credit institutions to use their money for a certain period of time 2.2 THEORIES 2.2.1 Exchange rate transmission mechanism Transmission mechanisms of monetary policy are changes in monetary policy management through transmission channels: interest rate, exchange rate, asset price, credit to impact to economic variables to achieve objectives such as macroeconomic stability and price control Exchange Rate Pass Through (ERPT) is defined as the rate of change in import prices due to a percent exchange rate change between import countries and export countries 2.2.2 Exchange rate theory Purchasing Power Parity (PPP) explains that the exchange rate between two currencies must be equal to the rate changes in national price level Interest Rate Parity (IRP) holds that the exchange rate is determined between the two currencies based on the current interest rates in those countries Trang The Mundell-Fleming model is a combination between Fleming's equation with Mundell's policy analysis These theoretical studies show that the effectiveness of monetary policy and fiscal policy depends on the exchange rate regime and the level of capital controls Market commodity balancing is made through the appreciation of the currency, not production increasing The Impossible Trinity or Triangle of Impossibility states that a country can not simultaneously implement three macroeconomic objectives: exchange rate stabilization, capital liberalization, independent monetary policy The Mundell-Fleming model and The Impossible Trinity are relatively appropriate for Vietnam's monetary policy and fiscal policy Because those theories meet the conditions of the economy as the price does not change much in the short term and the capital is freely circulated In addition, this model is suitable for the small and open economy, where can not be affected by world interest rates as well as the output of other economies 2.3 EMPIRICAL RESEARCHES The current ERPT study, the relationship between exchange rate and price, or exchange rate and inflation are done by Carthy (1999), Grauwe & ctg (2005) The Goldfay & ctg (2000); Ito & ctg (2005) Some other studies tend to analyze fixed or floating exchange rate regime policy such as Frenkel, 2012; Reinhart, 2004; Donald, 2007, Kato, 2007 In Vietnam, most of studies analyzed the exchange rate transmission mechanism uch as Truong Van Phuoc & et al (2005), Tran Ngoc Tho et al (2012) Other studies have analyzed the effect of CNY on other currencies such as Shu & ctg (2007); Kinnon & ctg (2003); Henning (2012) In Vietnam, researches by Le Xuan Sang (2013); Nguyen Quoc Thai (2013) reviews the internationalization of CNY and its impact to Vietnam's financial instability Thus it is important to study the role of CNY, but these studies are only focused on situational analysis, and does not quantify the specific impact on the economy International studies on the USD fixed exchange rate regime and the impact of a third currency exchange rate shock on a particular country’s macroeconomy have been done many times such as Kinnon & ctg (2003), Ibarahim (2007) ) Research samples use developed countries or countries with market economies, but Vietnam is not mentioned Therefore, a research needs to be Trang intensive and combined several factors for more comprehensive results It is explained that calculating and quantifying the magnitude of impact of exchange rate shocks on macroeconomic factors are required Furthermore, the study applies theoretical foundations to economic conditions such as Vietnam to see if the results are consistent with previous empirical studies The results are used for policy recommendations CHAPTER 3: THE IMPACT OF USD/VND EXCHANGE RATE TO MACROECONOMIC FACTORS IN VIETNAM 3.1 INTRODUCTION East Asian countries (except Japan) choose the fixed exchange rate regime in USD With this regime, which helps Vietnam's economy avoiding exchange rate shocks or not; and how much this impact is, will be solved by the results of the research 3.2 USD/VND EXCHANGE RATE POLICY IN VIETNAM • 1999-2006 In this period, because of the application of the fixed exchange rate regime, the average interbank exchange rate announced by the State Bank was around from 14,000 VND / USD to 16,000 VND / USD In 2005, the State Bank of Vietnam (SBV) announced the Ordinance on Foreign Exchange and the International Monetary Fund (IMF) officially recognized Vietnam's liberalization of current transactions In 2006, the Vietnamese foreign exchange market began to be underpressured by international economic integration The amount of foreign currency transferred into Vietnam increase strongly WB and IMF have warned that the SBV should increase the flexibility of the exchange rate due to the increasing capital flow into Vietnam Figure 3.1: USD/VND Exchange rate from 1999 to 2006 Trang 16500 16000 15500 15000 14500 14000 13500 13000 12500 1999 2000 TG BQLNH 2001 2002 TG NHTM 2003 TG TRẦN 2004 2005 2006 TG SÀN Sources: SBV, VCB and author’s data collection • 2007 - 2011 Figure 3.2: USD/VND Exchange rate from 2007 to 2011 TG TRẦN TG SÀN TG NHTM TG CHỢ ĐEN 2/ 1/ 20 07 2/ 4/ 20 07 2/ 7/ 20 07 2/ 10 /2 00 2/ 1/ 20 08 2/ 4/ 20 08 20 /6 /2 00 2/ 7/ 20 08 2/ 10 /2 00 2/ 1/ 20 09 2/ 4/ 20 09 2/ 7/ 20 09 2/ 10 /2 00 2/ 1/ 20 10 2/ 4/ 20 10 2/ 7/ 20 10 2/ 10 /2 01 2/ 1/ 20 11 2/ 4/ 20 11 2/ 7/ 20 11 3/ 10 /2 01 30 /1 2/ 20 11 22000 21000 20000 19000 18000 17000 16000 15000 Sources: SBV, VCB and author’s data collection This is the time that the USD / VND exchange rate fluctuated sharply After Vietnam's accession to the WTO, the liberalization of capital account was widened, leading to increased inflows of capital into Vietnam which greatly affected the fluctuation of the exchange rate At the beginning in April 2007,the combination of international debts, deficit balance of payments due to high trade deficit and the sharp decline of foreign exchange reserves created a strong demand for USD The State Bank of Vietnam (SBV) continuously solds foreign currency to intervene the exchange rate when the market appeared the official exchange rate and the black market rate with large gap for a long time By the end of 2011, the SBV had used many approaches to control and stabilize the market Trang • 2012 - 2017 The USD/VND exchange rate was stable in this stage, the SBV's exchange rate management policy was fit with market developments The SBV's monetary polices had made positive changes in the forex market, and the black market had almost ceased In addition, SBV also narrowed the difference between the interbank rates and the exchange rates listed by commercial banks (100-300 VND/USD ) Thus the psychology of holding foreign currencies of organizations and individuals had declined The SBV extended the exchange rate to +/- 3% by 2015 On 31/12/2015, the SBV issued Decision No 2730 / QD-NHNN which announced the base rate of USD / VND, cross exchange rate of VND with other foreign currencies The exchange rate management policy of the State Bank corresponded with the current conditions of Vietnam, which promoted greater flexibility and activeness with market movements Figure 3.3: USD/VND Exchage rate from 2012 to 2017 23000 22500 22000 21500 21000 20500 20000 19500 2/ 1/ 2/ 012 3/ 2/ 012 5/ 2/ 012 7/ 3/ 012 9/ 2/ 201 11 /2 2/ 012 1/ 2/ 013 3/ 2/ 013 5/ 2/ 013 7/ 3/ 013 9/ 2/ 201 11 /2 2/ 013 1/ 2/ 014 3/ 2/ 014 5/ 2/ 014 7/ 2/ 014 9/ 2/ 201 11 /2 2/ 014 1/ 2/ 015 3/ 2/ 015 5/ 2/ 015 7/ 2/ 015 9/ 2/ 201 11 /2 2/ 015 1/ 2/ 016 3/ 2/ 016 5/ 2/ 016 7/ 2/ 016 9/ 2/ 201 11 /2 2/ 016 1/ 20 17 19000 TG BQLNH TG NHTM TG TRẦN TG SÀN Sources: SBV, VCB and author’s data collection Thus, Vietnam's exchange rate policy has its main characteristics Firstly, the exchange rate policy of Vietnam in many periods tends to be fixed with USD was main foreign currency Secondly, the fixed exchange rate VND/USD had affected trade and investment with other countries Thirdly, the Average Interbank Exchange rate published daily by the State Bank of Vietnam did not always reflect the real supply and demand of the market, especially when there was a situation of excess or tension in foreign currency Finally, the inflexible and non-marketable exchange rate policy had huge impact on the economy Trang 3.3 RESEARCH METHODS Formula Model VAR: yt = Ddt + A1 yt-1 + …+ Ap yt-p + ut Where yt = (y1t , y2t , …ynt) is the vector series (nx1) of the endogenous variables in time series t, D is the matrix of blocking coefficient dt, Ai is the coefficient matrix (k x k) for i = 1, , p of endogenous variables with the delay yt-p ut is the white-noise errors in the equations covariance matrix system is the unit matrix E(ut,ut’)=1 The regression model will be considered for selection after performing the tests, especially the stopping test of time series The results show that the data series does not stop at the same level It is necessary to conduct VAR model to test the impact of the USD / VND exchange rate on the macroeconomic factors of Vietnam, such as GDP, CPI and M2 The VAR model is used because of its many advantages Firstly, the VAR model does not distinguish endogenous and exogenous variables during regression, the variables in the endogenous model not affect the reliability of the model Secondly, the VAR model is executed when a variable value is expressed as a linear function of the past or delay values and all other variables in the model, thus long-term data sets are not required , the model is often appropriate for regressing developing countries Thirdly, the VAR incorporates with convenient measurement tools such as push response,decomposition, etc., to aid in clarifying how each variable reacts to the shocks of other variables 3.4 MODEL AND DATA Table 3.1: Determining variables method Variables Symbol Used variables/Calculation Sources Vietnam growth GDP GDP (%) ADB Consuming Price LNCPI00 The CPI is calculated by CPI of each year with base year (1st quarter 2000 CPI), then log IFS Money supply LNM2 Sum of payments, then log IFS Trang Figure 5.1: Total export and import in Vietnam and China from 2000 to 2017 120 100 80 60 T USD 40 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Kim ngạch XK VN sang TQ 1.5 1.42 1.52 1.88 2.9 3.23 3.24 3.65 4.85 5.4 7.74 11.61 12.39 13.1 12.5 17.14 21.97 35.3 Kim ngạch NK VN sang TQ 1.4 1.61 2.16 3.14 4.6 5.9 7.4 12.71 15.97 15.41 20.2 24.87 28.79 36.80 35.60 49.53 49.92 58.5 Tổng kim ngạch XNK VN - TQ 2.9 3.03 3.68 5.02 7.5 9.13 10.64 16.36 20.82 20.81 27.94 36.48 41.18 49.9 48.1 66.67 71.89 93.8 Sources: GSO (2018) Figure 5.2: Chinese trade deficit against Vietnamese trade deficit 2000 - 2017 3500 3000 2500 2000 1500 1000 500 Tỷ lệ nhập siêu từ TQ so với tổng nhập siêu VN (%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 17 21 25 31 58 82 64 62 78 110 179 3,280 1,129 1,777 915 1,570 869 Sources: GOS (2018) On the other hand, trade deficit from China accounted for the enormous percentage of Vietnam's trade deficit, which was at a very high level: 31% (2004), 869% (in 2017) Moreover, trade deficit from China began to exceed the general level of Vietnamese balance of payment deficit from 2010 The matter is that the pace of increase in imports from China is growing fast, while exporting to this country increased negligible The over-reliance on imports from China creates an unequal economic relationship • Investment relationship Until March 2016, according to GSO ranking, China's FDI was ranked at out of 112 countries and territories investing to Vietnam with 1,346 projects in force and total registered Trang 18 capital of 10.4 billion USD China already has its investment projects in 54/63 provinces and cities of Vietnam • The impact of the CNY valuation to Vietnamese economy With VND is being tightened to USD, if CNY appreciates against USD, the correlation between CNY and VND will also change The import surplus of Vietnam from China is increasing year by year, which will cause the importing cost of Vietnam will go up when CNY rises against VND In addition, as CNY increasing and Chinese interest rates goes up, the return on investment decreases, many Chinese businesses may also choose to invest abroad China's asset pool will increase accordingly and overseas investment activities will boom Therefore, the impact of CNY rising on the world economy will be enormous For China's neighboring and weaken economies, this warning is growing in real, especially in Vietnam 5.3 RESEARCH METHOD The SVAR model is theoretically described as following: A0 Yt = A1Yt-1 + A2Yt-2 + ApYt-p + ut (1) Or can be rewritten: Yt = A0-1* A1Yt-1 + A0-1* A2Yt-2 + A0-1* ApYt-p + A0-1 ut (2) Yt = B1Yt-1 + B2Yt-2 + BpYt-p + et Where : Bs=A0-1As, s=1, 2, …, p and et=A0-1ut; et, ut are corelation remaining part of equation (1 and 2) The regression model will be considered for selection after performing the tests, especially the lagging time series test The results show that the data series not stop at the same differential level Thus it is necessary to test the impacts of USD / CNY on macroeconomic factors in Vietnam such as GDP, CPI and M2 variables by using the SVAR model The SVAR model is used because of its distinctive feature which is the ability to decompose random shocks in the model, the influence of variables on each other is based on the Trang 19 equations in the SVAR model Furthermore, SVAR helps to estimate the magnitude and time of a specific economy with different types of shock, so that it is easier to forecast and set suitable policies Figure 5.3: Regression model determination Sources: author 5.4 RESEARCH MODEL AND DATA The study has variables as following: GDP, CPI, M2, USD/VND USD/CNY The data is quarter records from 1st quarter 2000 to 1st quarter 2017 Table 5.4: Variables determination method Variable Symbol Variable calculation Source Vietnam’s growth GDP GDP index (%) ADB Consumer price LNCPI00 The ratio of CPI in year t on base year (1st quarter – 2000), then log IFS Money supply LNM2 Total payment, then log IFS Real exchange rate USD/VND LNRUSDVND00 The ratio of real exchange rate in year t on base year (1st quarter – 2000), then log IFS Nominal exchange rate USD/VND LNUSDVND00 The ratio of nominal exchange rate in year t on base year (1st quarter – 2000), then log IFS Trang 20 Nominal exchange rate USD/CNY LNUSDCNY00 The ratio of nominal exchange rate in year t on base year (1st quarter – 2000), then log IFS Real exchange rate USD/CNY LNRUSDCNY00 The ratio of nominal exchange rate in year t on base year (1st quarter – 2000), then log IFS Depository rate in VND Depository rate in CNY of China IRB Percentage (%) IFS IRB CHINA Percentage (%) IFS Sources: author Bảng 5.2: Descriptives variables Variables Average GDP 6.71 Mean Std Min Max N 6.12 1.34 3.12 9.50 69 LNCPI00 5.15 4.83 0.43 4.58 5.75 69 LNM2 21.01 20.35 1.15 19.10 22.70 69 LNRUSDVND00 4.49 4.39 0.18 4.26 4.74 69 LNUSDVND00 4.83 4.73 0.15 4.61 5.09 69 LNRUSDCNY00 4.67 4.64 0.069 4.58 4.93 69 LNUSDCNY00 4.62 4.60 0.074 4.60 4.94 69 IRB 7.58 5.97 2.96 3.54 16.99 69 Sources: author 5.5 EXAMINING THE IMPACT OF USD/CNY EXCHANGE RATE ON VIETNAMESE MACROECONOMY 5.5.1 Model Tests Using the Dickey-Fuller unit test, we find that with levels α = 0.05%, stationary series stopped at level and are as follows: LNRUSDCNY00 ͌ I (1), LNRUSD / VND00 ͌ I ), GDP ͌ I (1), LNCPIVN00 ͌ I (1), LNM2, ͌ I (2) Thus, the data series did not stop at the same error level The selection of the optimal latency of the model is based on SC, HQ which has p=1 The results show that the p-value