US Rate Hike, 20-Year Forex Reserves Hit Bottom

In the United States, under the stimulus of three major crises - soaring inflation, rising debt, and bank failures, the likelihood of systemic financial risk is increasing.

The Federal Reserve continues to maintain high interest rates, which not only puts pressure on American consumers but also reveals the first Asian country to fall.

The plight of national bankruptcy reemerges, and their only hope lies with China.

On May 17th, despite the Federal Reserve's announcement that the core CPI had slightly declined, it remained high at 3.6%, and the rolling CPI for April was even higher at 4.1%.

This is twice the gap from their target of keeping inflation within 2%.

Therefore, predicting the possibility of the Federal Reserve raising interest rates based on current U.S. inflation data has essentially failed, and it is likely that inflation in the United States will remain high for the long term.

However, several officials from the Federal Reserve still stated that they would need to see further reductions in inflation before considering a rate cut.

This has once again led to a rebound in U.S. Treasury yields from the low levels of the past two months.

Even so, Asian countries are struggling, and the first to fall has already emerged.

When it comes to countries that can no longer hold on, people first think of Japan.

However, Japan has $3 trillion in foreign exchange reserves, with about $1.2 trillion invested in U.S. Treasury bonds.

So Japan still has the confidence and means to cope with the U.S. dollar's harvest, but this also depends on the will of the United States.

If the United States wants the yen to devalue, Japan is unlikely to dare to defy.

Last year, one or two Asian countries also faced the crisis of national bankruptcy, and indeed, one country declared bankruptcy, which was Sri Lanka.

So why did Sri Lanka go bankrupt at that time?

It was due to the U.S. dollar interest rate hikes and the outflow of dollars, the depletion of foreign exchange reserves, and the inability to repay international debts that were due, leading to the declaration of national bankruptcy.

Pakistan also faced the plight of running out of U.S. dollar foreign exchange last year, but in the end, it was China that stepped in to help Pakistan overcome internal and external troubles.

Now, Vietnam is facing the same problems as these two countries.

Under the dual pressures, this emerging country that once claimed to replace China's position as the "world's factory" is on the verge of exhaustion.

Since the 2008 subprime crisis, the United States has adopted a loose monetary policy, and the Vietnamese dong has depreciated by more than 60%, with a depreciation of up to 23% since its peak in 2021.

Currently, the biggest challenge Vietnam faces is a severe shortage of foreign exchange reserves.

Once the foreign exchange reserves are depleted, the Vietnamese dong's exchange rate will collapse completely, which is the serious crisis Vietnam is facing now.

For a long time, Vietnam's rapid economic growth has been attributed to high-risk loans and the accumulation of foreign debt, resulting in a staggering $185.6 billion in foreign debt.

In other words, Vietnam has used the U.S. dollar to promote its own economic development and has accumulated a huge debt during the period of loose U.S. dollar policy.

However, as the Federal Reserve enters the interest rate hike cycle and the U.S. dollar policy tightens, a large amount of U.S. dollar funds are fleeing Vietnam.

To maintain exchange rate stability, Vietnam has to use a large amount of foreign exchange reserves.

However, how much foreign exchange reserves does Vietnam have left?

Only $60 billion, which is not enough to repay Vietnam's foreign debt.

Coupled with Vietnam's slowing exports and declining economic growth, the foreign exchange they can earn will become less and less.

This leads Vietnam to face the same plight as Sri Lanka, that is, the depletion of foreign exchange and the country facing bankruptcy.

In the past, Vietnam has created global attention with its export-driven economic growth, but the ironclad fact is that this is just a castle in the air.

Based on the premise of having no complete industrial foundation, no resource support, no diversified foreign exchange reserves, and no diversified export markets, relying solely on cheap labor and temporary support from the United States.

It is a pipe dream to think that it can naturally replace China's position as the world's factory, but many Vietnamese actually believe it.

With a sharp decrease in foreign exchange reserves and economic growth not meeting expectations, Vietnam is in a very difficult situation.

In the face of internal and external troubles, Vietnam once again turns its sights on China, hoping that China will help and once again drive economic growth through infrastructure construction.

Several high-ranking Vietnamese officials have stated that Vietnam is actively seeking to join the BRICS, and also hope that China will replace Japan to help Vietnam build high-speed railways.

Recently, Vietnamese Foreign Ministry spokesperson Ms. Pham Thuy Hang gave a clear answer about Vietnam's accession to the BRICS, stating that Vietnam has always been actively interested in joining the BRICS and pays close attention to the expansion of the BRICS.

Previously, the Vietnamese ambassador to Russia, the South African Foreign Ministry, and Russian Foreign Minister Lavrov have all expressed the same view, that is, Vietnam is actively seeking to join the BRICS.

This was unimaginable before, and the reason behind it is obvious, it is Vietnam's profound realization in recent years.

In Vietnam, the economy is very susceptible to external factors, such as oil prices, U.S. dollar interest rates, and exchange rate changes.

They have a large population, but their manufacturing industry is still in the exploratory stage, mostly supported by industries with little technological content.

The added value is not high, and the economic structure is so single, becoming a stumbling block on the road to development.

The things they sell out are basically a few, such as textiles, seafood, shoes, rice, electronic products, and coffee.

These things account for 70% of the export volume!

Without a strong national industry as a backing, without strict financial policy support, their national strategy and capital expectations will be in vain.

Because the infrastructure is not perfect, many factories are struggling, and corporate credit risks are becoming more and more obvious.

If the export industry continues to decline, Vietnam's economy is likely to enter a recession period of up to 20 years, and the gap with other countries' manufacturing industries will become larger and larger.

Vietnam has already realized that it no longer wants to be led by the United States.

They want to join the BRICS organization.

The United States has always warned other countries not to join the BRICS, and Vietnam, as the second-largest ally of the United States in Southeast Asia, joining the BRICS was a thing that was unthinkable before.

In fact, Vietnam joining the BRICS, taking over the downstream links in China's manufacturing industry chain, becoming a processing base for China, and selling products with American trademarks can effectively avoid trade barriers.

In addition, South Korea's investment scale in Vietnam is very large, with Samsung accounting for nearly 20% of Vietnam's export total, but most of the product components are imported from China.

Vietnam's economic and trade structure has a serious imbalance problem.

Although the trade surplus is mainly brought by foreign capital, the local industry has been at a disadvantage.

In other words, a large part of Vietnam's hundred billion dollars of reserves is actually the regular profits of foreign capital, and this money can run away at any time, which is not Vietnam's true wealth.

Now, if Vietnam does not change its policy, the depletion of foreign exchange is a high probability event, and Vietnam facing national bankruptcy is also a high probability event.

Now, Vietnam once again turns its sights on China, hoping to cooperate with China to build high-speed railways, and in fact, China has basically satisfied Vietnam's wish, and the China-Vietnam high-speed railway is already in the planning stage.

In fact, China's heart can be seen from its actions.

In early April this year, the tunnel that directly connects China and the China-Vietnam border port of Pingxiang has been fully connected.

It is obvious that the railways and high-speed railways of Southeast Asian countries, including Vietnam, have long been in China's plan, which is the heart of a big country.

Not only that, in order to cope with the depletion of U.S. dollar foreign exchange, Vietnam has also increased the proportion of the renminbi as foreign exchange reserves and signed a local currency settlement agreement with China.

It is not too late to mend the sheepfold, and the renminbi has provided a certain safety cushion for Vietnam's foreign exchange.

After nearly ten years of twists and turns, Vietnam will know in the future what role it will play between China and the United States, and Vietnam will be clear in the future.