Looks like China no longer appears as a bargain and some corporations might be tempted by mitigating the risk of their overdependence over operating in one country only.

The International Herald Tribune make a very interesting point here, not by ranking the two countries systems but by pointing out their similarities and why top Chinese policy makers have been watching the Vietnamese economic unfold : What is happening in Vietnam rings an alarm bell for China.

There is little contagion risk, as the Vietnamese economy is less than a third of the size of nearby Thailand, which triggered the 1997 Asian financial crisis.

But China and Vietnam have similar fundamental economic problems. Both face mounting inflation pressures, they have large foreign money inflows and both have been reluctant to let their currencies appreciate in recent years.

Vietnam, often referred to as little China, has followed its larger neighbor in beginning market-oriented reforms.

Like many of its Asian neighbors who want to use exports to pull out of poverty, Vietnam chose to resist currency appreciation so it could keep its costs low.

Importantly, Vietnam, unlike China, failed to soak up the funds it injected into the domestic banking system when it bought up the foreign investment inflows. The result was 54 percent credit expansion in 2007 and a current inflation level above 25 percent.

“The issues are the same, but their policies are completely different,” said James McCormack, a managing director at Fitch Ratings. “China’s response to inflation has been more aggressive and effective.”

China’s pockets are deeper. It boasts large reservoirs of domestic and foreign cash, which help it lock in excess liquidity and release it when necessary. It has $1.7 trillion in foreign reserves, the largest amount ever held by any country.

Still, the Vietnam experience is a rude awakening for China. Before the Vietnam crisis, several influential domestic experts in China had proposed that policy makers allow domestic inflation to rise to correct the undervaluation of the currency, instead of allowing the nominal exchange rate to go up.

Vietnam shows that that would have been a big mistake because inflation can do a lot of damage. Exports would be hurt because high inflation drives up the cost of doing business.

Vietnam has been so focused on rapid economic expansion that it forgot how economic overheating could sacrifice short-term growth.

By comparison, Beijing has been far more assertive in controlling liquidity.

Last week, Beijing unexpectedly lifted the bank reserve ratio, the money banks must hold in cash or on deposit, by a full percentage point to a record 17.5 percent. Many experts see this as a signal that Beijing is taking inflation more seriously.

What makes Vietnam’s currency policy even more vulnerable, the country has a fairly open capital account.

Vietnam, on the other hand, has operated a policy that pushes the dong slightly lower against the dollar each year.

Vietnam has taught Chinese leaders that negative real interest rates, an open economy and fixed currency are a “recipe for disaster,” said, Hong Liang, an economist at Goldman Sachs. No country can fix interest rates and exchange rates unless the economy is closed. Both Vietnam and China have moved to become more open and market oriented.

The lesson for China is that it needs to allow more flexibility in the yuan and to take seriously the risks posed by inflation. Otherwise, what seems like a minor headache could well turn into a policy nightmare.

Look,  this can only be true because it has been stated on a report by S&P, a major rating agency.

Those guys are never wrong, as we all know.

Vietnam’s extensive” capital controls and the management of its currency will prevent overseas investors from fleeing the nation even as inflation accelerates and economic growth slows, said Standard & Poor’s.

Foreign funds are mostly limited to buying property and stocks, said Ping Chew, the Singapore-based head of Asian sovereign and corporate ratings at S&P, the first of three ratings firms to lower the Southeast Asian nation’s credit outlook to negative. Stocks have slumped almost 60 percent this year, the world’s worst performance, and the dong is set for its biggest drop since 2001, falling 3.6 percent.

Is this so bad ?

“Vietnam is not in a currency crisis,” Chew said in a June 17 interview. “There’s definitely a bit of hot money that went in. But is it going to leave en masse like that which decimated Asia in 1997? I don’t think so.”

Vietnam’s inflation rate rose to 25 percent in May as food and energy prices climbed and the trade deficit tripled in the first five months of the year.

Foreign investors have cut their stock purchases in half this year to $334.2 million, according to data compiled by Bloomberg. Morgan Stanley last month said the dong was heading for a “currency crisis,” citing a widening current-account deficit. Calyon, Credit Agricole SA’s investment banking unit, said this month there was a threat of a balance of payments crisis and Citigroup Inc. said a banking crisis is the primary problem facing Vietnam.

“Vietnam is turning into a very bad story,” said Thomas Harr, a senior currency strategist from Standard Chartered Plc in Singapore. “The 2 percent devaluation a few weeks ago was not a good move. They should instead have been more aggressive on hiking rates to signal that they are committed to dealing with inflation.”

The dong won’t stop falling until investors are convinced of the central bank’s commitment to fight inflation, he said.

What else ?

The impact of flagging confidence will be limited as investors will “have difficulty” taking profits out of Vietnam, said Joseph Lau, an economist at Credit Suisse Group in Hong Kong.

“Generally banks aren’t allowed to trade the currency for speculation, you need to have a reason for it,” said Lau. “It is difficult for a householder to purchase dollars legally, which is why when they do want to do it, they have to go through the black market.”

So what’s the good new ? Got Any ?

Vietnam’s economy “is in reasonably good shape,” buoyed by strong currency reserves, Alex Thursby, Asian-Pacific managing director for ANZ told reporters in Ho Chi Minh City. “I don’t think there’s a crisis.”

Vietnam’s foreign currency reserves are about $20 billion to $22 billion, Credit Suisse’s Lau said. By comparison, the market capitalization of companies on Vietnam’s benchmark stock market, the VN Index, is $9.08 billion, the second smallest in Asia after Sri Lanka, according to data compiled by Bloomberg.

“This is still a managed currency with extensive capital controls,” said Chew at S&P, which issued a report today saying that Vietnam faces pressures but no crisis.

Here is a simple solution, pointed by Business Week Eyes On Asia Blog:

With Asian governments from Beijing to Manila to Delhi trying to tame the inflationary beast, the Cambodians have come up with a rather unusual solution of their own. According to the Phnom Penh Post the economic mandarins in Phnom Penh have decided to cease publication of inflation figures to avert the possibility of “disorder and turmoil.” The most recent figures for January showed the CPI was up 18%.

In neighboring Vietnam, where May figures showed inflation raging at 25%, the government is moving towards more, not less disclosure. Hanoi has finally realized that a lack of transparency only fuels speculative behavior and panic.

But as I update this blog on June 24, I see the Financial Times ran a story saying Vietnam had temporarily halted gold imports to prevent speculators dumping their dong. Apparently Vietnam has become the single largest market for gold bullion. That doesn’t come as a complete surprise to me, as last week during a lunch in Ho Chi Minh City, Scott Robertson, senior economist of Ho Chi Minh City-based Dragon Capital Group, and his boss, director Dominic Scriven, told me that on average $400 million worth of gold changes hands on the local gold exchange every day. By comparison, daily turnover of equities on the Ho Chi Minh exchange recently has been between $3 million and $10 million per session.