COLUMN-Vietnam rings an alarm bell for China

(Wei Gu is a Reuters columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, June 18 (Reuters) - China's top policy makers have been watching Vietnam's economic crisis unfold with good reason: What is happening in Vietnam rings an alarm bell for China.

There is little contagion risk, as Vietnam's 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 neighbour in launching market-oriented reforms.

It has entered the World Trade Organization and established itself as a low-cost manufacturing base, putting the country on the map of global investors. But as foreign capital flooded in, the investment boom led to an overheating of the economy.

Like many of its Asian neighbours 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 dong 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.