Vietnam Central Bank Dilemma: Zhang Meilan Financial Case Triggers Chain Risks, Rate Hikes Fail to Save the Vietnamese Dong

Vietnamese currency is caught in multiple crises. Last Friday, the USD/VND exchange rate fell to a historic low of 25,460. This is not just simple currency fluctuation but reflects a dual assault from domestic financial crises and external strong dollar shocks. As of writing, the USD/VND has risen 4.92% in 2024, with nearly a 9% increase over the past year, currently trading around 25,453.

The Root of the Financial Storm: A Female Tycoon Sparks a Systemic Crisis

The Zhang Meilan financial scam is evolving into a systemic risk for Vietnam’s financial system. The former real estate magnate was arrested in October 2022 for allegedly embezzling 304 trillion VND (about $12.5 billion) borrowed from Saigon Commercial Bank, with funds transferred to shell companies. In April this year, she was sentenced to death.

This case involves Vietnam’s fifth-largest bank—Saigon Commercial Bank (SCB)—triggering a chain reaction. Since the central bank intervened to oversee the investigation, the bank’s deposits have plummeted by 80% before December 2023, leaving only about $6 billion. More concerning, bad debts have risen to 97.08% of the bank’s credit balance. At the current rate, the bank may deplete its deposits before mid-year.

Central Bank’s Treasury Faces Exhaustion Risks

To prevent a banking system collapse, the Vietnam central bank has been forced to intervene. By April, it injected $24 billion in special loans into SCB. However, the problem is that Vietnam’s foreign exchange reserves are only over $80 billion. According to sources cited by Reuters, the central bank is caught in a dilemma: “If it doesn’t provide loans, SCB will collapse; but if it continues to lend, Vietnam’s national treasury will gradually deplete.”

This panic quickly spread across the market. Vietnam’s real estate and corporate bond markets declined, the stock market came under pressure, and investors rushed to sell VND assets, leading to a “double whammy” of stock and currency depreciation.

Capital Flight and Economic Bleeding

The instability in the banking system further accelerates capital outflows. Vietnamese banks, worried about rising non-performing loans, tightened financing requirements for corporate collateral, directly increasing borrowing costs for businesses and prompting more international capital to withdraw.

Data shows that since 2023, total foreign investment in Vietnam has decreased by over 30%, reaching 31.3%. Over 1,300 trillion VND has exited the Vietnamese market. The VNINDEX, Vietnam’s main stock index, has fallen 1.29% in the past month. The significant outflow of international capital is seen by analysts as a sign that Vietnam is losing its position in the Asian supply chain, with some predicting the economy could face a prolonged two-decade recession.

External Shocks: Currency Wars in the Era of a Strong Dollar

Beyond internal crises, Vietnam must also contend with the global impact of a strong dollar environment. The US is Vietnam’s largest export destination, accounting for over 28% of its total exports in 2023. With high US interest rates and expectations of low economic growth, US demand for cheap imported goods is rising, putting downward pressure on the VND.

This is not just Vietnam’s problem. Major Asian currencies like the yen, won, and baht are also affected by the strong dollar, sparking an “Asian currency defense war.” Last Tuesday, the Vietnam central bank stated it was forced to sell large amounts of US dollars earlier this year to support the dong, and is now trying to stabilize foreign exchange reserves by purchasing more dollars.

Vietnam’s Dilemma in Raising Interest Rates

Faced with the sharp depreciation of the VND, raising interest rates has become a discussed option. In theory, higher rates could attract international capital back and ease exchange rate pressures. However, HSBC analysts recently stated that, given the economy is just beginning to “bud” and the credit market remains weak, raising rates might do more harm than good.

While rate hikes might support the VND in the short term, the cost would be further increased corporate financing costs. During a fragile economic recovery, this would be like adding insult to injury. With the financial system already on the brink and large-scale capital outflows ongoing, the effectiveness of Vietnam’s rate hike policy is questionable. The Vietnam central bank is caught in a policy dilemma with no easy way out.