The Taiwan Banker

Deng Xiaoping’s historic Southern Tour established the role of special economic zones in China’s governance, the most successful example of which was Shenzhen. The significance of that trip was however hardly local; rather, Shenzhen was taken as a pilot for a larger reaffirmation of “Reform and Opening,” which eventually established China as a global manufacturing leader. Today, however, the degree of importance of manufacturing for Asian and global development is coming under increased question. Part of the reason has to do with demand: the US has become less willing to absorb exports surpluses, resulting in the trade war. Regarding supply, meanwhile, because so many countries have now taken this path, the field has become crowded. Cases like Bangladesh show that manufacturing is probably still necessary at the early stages of development, but it has become equally necessary to subsequently identify specialized niches of excellence, and then to pivot quickly away from more generalized dependence on factories for employment. There may be no other country in as urgent need for this pivot as Vietnam, which has been penalized by the US for its macroeconomic policies under both Trump administrations. In December 2020, the US labelled it a currency manipulator for its persistent trade surpluses; this April, it imposed a 46% ‘reciprocal’ tariff rate. For its part, the country’s Communist leadership also recognizes that the growth model based on final assembly and export has almost run its course. The May Resolution 86 for the first time calls the private sector the “one of the most important driving forces of the socialist-oriented market economy,” in one of the most important updates ever to the original Doi Moi policy – Vietnam’s counterpart to China’s Reform and Opening, which also dates to the same period. If this new economic model had a Shenzhen, meanwhile, it would be International Financial Centers (IFCs) planned in Vietnam’s commercial capital of Ho Chi Minh City, along with Da Nang, a central coastal city with Vietnam’s fourth largest population. These IFCs will combine the resources of international capital markets with Vietnam’s own industrial ecosystem, despite its relatively tight capital controls. The two are meant to work in an integrated fashion – “one center, two destinations” – with the former being more comprehensive, and the latter focusing more on certain experimental areas. While many jurisdictions in Asia have been making similar efforts recently, to a greater or lesser degree, Vietnam stands out due to the coupling of its financial reforms with an attempt to restructure the real economy as well. One unique feature of Vietnam’s IFCs is their proposed use of civil law courts and arbitration, English language contracts, and foreign judges to give foreign investors confidence in their ownership rights. Vietnamese law is based on French common law, combined strongly with socialist regulation-via-policy. Such depth of innovation indicates Vietnam’s willingness to cooperate with American demands – part of the ideological flexibility which has allowed it to forge “Comprehensive Strategic Partnerships” with an internally contradictory group of partners including China, Russia, India, and Japan, along with the US. This feature might seem to make Hong Kong an obvious comparison point for these centers, but the analogy is not exact. The push for financial centers in countries like Japan and Taiwan, as well as mainland China, in addition to Vietnam, was strongly linked to Hong Kong’s post-COVID decline, but the former cases have not attempted to replicate Hong Kong’s legal system. Dubai’s International Financial Centre, meanwhile, which has also been on the rise over the past few years, likewise makes use of common law, but the region lacks the deep industrial base of those Asian countries. Only Vietnam will combine both manufacturing resources with an English-inspired legal system. Besides its proximity to Chinese capital demand, the advantages of Hong Kong’s legal system turned it into location-independent contractual center for transactions, but Vietnam probably does not aspire to fully replicate this model, which is most applicable to independent cities like Hong Kong and Singapore. Furthermore, Hong Kong itself regained its 3rd place ranking in the Global Financial Centres Index this year, as the events which previously tarnished its reputation fade further into the past. Given the full context, Shenzhen might be a more suitable comparison point than Hong Kong. From a purely financial perspective, it is not clear that the legal reforms will be a game-changer compared to numerous other issues like capital account restrictions, competition from the state-owned economy, and enforcement of judgments involving the internal economy. Doi Moi favored the FDI model significantly more than China did during its opening phase, the latter having preferred to leave the finances offshore in Hong Kong, while never losing sight of its main objective to eventually replace that foreign capital. Vietnam’s core problem is not exactly a lack of foreign capital; instead, it now needs a broader economic upgrade from production concentrated in SMEs, and an internal financial system dominated by bank lending. It needs larger, more nimble private champions – a challenge which is less about technology than about institutional environment. In that sense, the legal innovation of the IFCs is less about finance than political economy, familiarizing bureaucrats and businesses with the operations of a more open economy. While there is certain signaling value toward foreign investors in such experimentation, the real benefit comes from the political follow-through. To be clear, Vietnam’s IFC plans (defined in this year’s Resolution 222) are not directly connected to Resolution 86, so while the country retains the optionality of eventually merging the two policy streams, such an outcome is not guaranteed. To put this point a different way, the main advantage of common law over civil law is its flexibility in not requiring different rules for each industry, so for it not to use this idea for cross-sector institutional innovation would mean a certain degree of wasted potential. It may be up to future political leaders to decide how exactly to balance vested interests with the needs of new market entrants. Surplus countries, like most of Asia, generally do not face acute crises which could force their economic models to change; instead, signs of the necessity for such changes tend to be more slow-moving and subtle. Different countries are responding differently to these shifts in the economic landscape, which are global in nature. Taiwan, more confident in its technological edge, for its part, is thinking more about refinements and less about wholesale economic reforms. The decentralization of finance will probably turn out to be a sustained, if gradual trend, moving away from the previous dependence on hubs like Hong Kong, and the resulting diversity of national financial strategies will provide rich material for future historical analysis.