Vietnam’s US relationship upgrade suggests new horizons
Beneath the Great Game geopolitics of US-Vietnam relations, there are some intriguing possibilities in the detail.
On September 10, Vietnam upgraded its relationship with the US to the highest level in its hierarchy of friendships, a two-level jump to 'Comprehensive strategic partnership'.
The symbolism was potent: the deal was signed by US president Joe Biden in person in Hanoi, putting the bilateral relationship at a status shared only by China, Russia, India and South Korea. China very much didn’t want it to happen.
Vietnam’s decision to go ahead anyway looks a lot like choosing a side, one it might not have taken had China not taken such a brazen position to claiming it owns much of the South China Sea.
But beneath the geopolitics, it is interesting to look at the knock-on effect. To banks and fund managers active in Vietnam, the most likely tangible outcome is for Vietnam to try to develop its own semiconductor industry, with considerable US assistance.
Today, Vietnam does a great deal in the semiconductor space, but only for other people. Intel and Samsung are present in the country, and the numbers are big – there have been years when Samsung’s Vietnam revenue has been equivalent to more than a quarter of the country’s GDP – but Vietnam occupies a position in global supply chains rather than being a designer and producer of top-level tech in its own right.
Trade is certainly at the heart of the new arrangement, and within a day of Biden signing, deals had been agreed with companies including Boeing, Microsoft and Nvidia. But it would certainly protect American supply-chain interests if Vietnam became another South Korea or Taiwan, a provider of high-quality chips to the US if, say, TSMC was no longer able to fulfil the role.
This is easier said than done: it requires not only factory hardware but a considerable upskilling of the labour force. It could take decades. But it is at the heart of a memorandum of understanding signed on innovation and technology between the two countries, and it is in America’s interests to make it happen, including the necessary technology transfer.
If we play that forward into banking and markets, it creates a very positive mood. Building a semiconductors industry requires plentiful financing and advice. It requires financial services around land acquisition, working capital, long-term equipment funding, trade finance.
It is a running gag in Vietnam that reclassification has been two years away from happening for at least a decade. This looks increasingly absurd
And from the fund management perspective, it suggests the prospect of more Vietnamese technology stocks to invest in, which would be most welcome: the current tech darlings of investors, FPT Telecom and Mobile World, have long since hit their foreign ownership limits.
Which brings us to the eternal question: are we any closer to Vietnam becoming a member of the MSCI Emerging Markets world?
It is a running gag in Vietnam that reclassification has been two years away from happening for at least a decade. This looks increasingly absurd: Vietnam has a larger market capitalization, and greater daily turnover, than many obvious peers such as the Philippines, which are long established as emerging markets. It is not inconceivable that in a year or two Vietnam could simultaneously be rated investment grade, but still considered a frontier market by MSCI, bracketed with Iceland and Togo.
Everyone knows what needs to change to achieve EM status: an end to foreign ownership limits and to pre-funding requirements when buying securities. And Vietnam is gradually moving there. The introduction of a new trading system, KRX, will be accompanied with a semi-effective workaround to the pre-funding matter. Officials have pledged to achieve the upgrade by 2025.
Does the US news push Vietnam further in that direction, and make it more willing to address the foreign ownership hurdle? It would be such an easy way for Vietnam to attract the capital it needs to build this bold new sector. The passive inflows that would follow a reclassification are estimated at $5 billion or more.
Fund managers trying to diversify away from China only have a handful of credible alternatives through which to achieve it – India, Indonesia, Mexico and Vietnam. But Vietnam, with one of the brightest stories, still makes it the hardest for foreign investors to gain exposure.
That must change, and surely now is the moment.