Escalating tensions between China and Vietnam, which exploded into violence last week, are expected to have some impact on the overall growth of Vietnam as investors grow worried about conditions in the country.
Filipino and Vietnamese activists protest outside the Chinese Consulate in Manila on Friday.
The worst civil unrest in recent years in Vietnam, if not dealt with in a timely manner, could harm trade relations between the two countries, as well as discourage future foreign investment in Vietnam.
While Chinese-owned businesses bore the brunt of the protesters’ anger, businesses owned by Taiwanese, Japanese, Korean, Singaporean and even Thai investors came under threat. The government now faces a major damage-control exercise.
Tension in the South China Sea (known as the East Sea in Vietnam) escalated last month when China set up an oil-drilling rig, accompanied by escort ships in Vietnam’s “exclusive economic zone and continental shelf”. Confrontations have become almost daily events, with a Chinese ship at one point using water cannon on a Vietnamese vessel.
The events have hardened anti-China attitudes, with protest meetings and demonstrations in major cities in Vietnam, as well as among the overseas Vietnamese community.
However, as peaceful protests gave way to violence, analysts fear political and territorial stress could spread to have economic consequences.
Trouble broke out last Tuesday when thousands of workers in southern Binh Duong province, a garment and footwear production hub 30 kilometres north of Ho Chi Minh City, took to the streets to protest against China’s transgressions. The marches began peacefully but eventually some angry workers broke the gates of foreign-owned companies, enticing others to join the rampage.
The Vietnamese government says one person was killed, but a doctor at a hospital near one riot site said he had seen many dead bodies and at least 100 wounded. An eyewitness said she had seen at least 13 people killed. The reports could not be confirmed.
The Chinese Foreign Ministry said two Chinese nationals died and it demanded that Hanoi bring the situation under control.
Provincial officials in Binh Duong said that around 19,000 workers participated in last week’s marches. Fifteen factories were burned, costing billions of Vietnamese dong in losses.
Protesters initially targeted factories owned by Chinese businesses but later, the angry mob started trashing any building with a Chinese name, including businesses owned by Taiwanese, Japanese and Korean companies.
To avoid damage, many companies shut down while some draped Vietnamese flags or their national flags on their buildings. Others hung banners declaring “We Love Vietnam”, “Hoang Sa (Paracel), Truong Sa (Spratly) belong to Vietnam”, or “We’re a Korean company” in Vietnamese.
The situation was brought under control as police dispersed protesters and detained hundreds of attackers, but the economic damage is likely to be felt for a long time.
Dang Ngoc Tung, the president of the Vietnam General Confederation of Labour, went on national television to declare that Chinese businesses and people were not involved in the Chinese government’s decisions. He urged workers to be vigilant and avoid illegal actions that would harm the country.
Government authorities also organised meetings to encourage people to “express their patriotism in peaceful ways” and “don’t let bad people take advantage and complicate the situation”.
Prime Minister Nguyen Tan Dung on Friday sent a mobile text message to millions of citizens urging them to “defend the fatherland’s sacred sovereignty” but not to engage in violence.
The worst consequences of the riots, however, could be the impact on the sentiment of investors from countries other than China, at a time when Vietnam is just starting to emerge from a prolonged slump.
“Anti-Chinese sentiment poses little downside risk to overall foreign investment in Vietnam as Chinese FDI is only a small proportion of the total. Taiwan, Singapore and South Korea are the major sources of FDI in Vietnam,” Fred Gibson, an associate economist at Moody’s Investors Service in Sydney, told Asia Focus in a telephone interview.
In a move to calm foreign investors, Prime Minister Dung directed the Ministry of Public Security and provincial authorities to ensure the safety of foreigners and foreign-owned companies.
He said his government was committed to ensuring absolute safety for people, businesses and foreign agencies in accordance with the law and its international commitments.
Meanwhile, consumer sentiment has turned decidedly anti-Chinese. Calls to boycott Chinese goods are spreading in social media and thousands of young people have responded.
There is a risk that Vietnamese goods sold to China would also suffer, similar to the impact seem in disputes between China and Japan. “If you are Vietnamese, you must not buy, use or trade Chinese goods,” the state-run Thanh Nien (Young People) newspaper quoted one young person as writing in an online forum.
In fact, many Vietnamese have been refusing Chinese goods in recent years due to their reputation for low quality or outright toxic content. Middle-income earners prefer made-in-Vietnam or imported products from Korea, Japan, Thailand, Malaysia or Singapore, which are getting cheaper thanks to free trade agreements.
However, poorer people in rural areas and students still buy a lot of Chinese goods because of low prices and variety. Prices of Thai or Korean products are often 20-30% higher.
China is still one of the largest export destinations for products made in Vietnam, especially labour-intensive goods.
It is noteworthy as well that Vietnam’s garment and textile industry relies heavily on imported raw materials, including those from China. Such dependence could diminish the country’s benefits if and when it joins the US-backed Trans-Pacific Partnership (TPP) now under negotiation.
Vietnam’s textile products would enjoy zero tariffs when exported to TPP members but the “yarn-forward” rule of origin requires nations to use TPP member-produced yarn in textiles to receive duty-free access. China is not a TPP member.
In 2013, Vietnam exported $17.95 billion worth of garment and textile products but imported raw material worth $14.8 billion, of which Chinese goods totalled $5.56 billion.
Total two-way trade was worth $50 billion last year. Vietnam’s trade deficit with China was $23.7 billion, an increase of 44.5% from 2012, the Vietnam General Statistics Office reported. Its main imports were consumer goods and parts for manufacturing, while exports to China were largely raw materials.
“We cannot help but co-operate with China but we should be vigilant to have a balanced trading relationship, especially in making decisions involving investment and procurement of machinery from China,” warned Le Dang Danh, former director of the Central Institute for Economic Management.
“China is Vietnam’s largest export destination, while Chinese tourists contribute a large proportion to the tourism industry. Ironically, anti-Chinese sentiment and the burning of Chinese factories will affect the Vietnamese economy more than it will China,” said Mr Gibson of Moody’s.
Rising wealth in China has also led to an explosion in outbound tourism, with Vietnam a major beneficiary.
China is also a big foreign investor in Vietnam with capital investment pledged in 2013 reaching $2.28 billion, second behind South Korea.
The country attracted a total of $21.6 billion in foreign investment in 2013, with newly pledged investment doubling from the year before to $14.27 billion.
SHIFT AWAY
In any case, the recent violence is likely to make many companies think about possibly shifting some investments from Vietnam to other destinations.
One of the beneficiaries could be Thailand, according to Udom Wongviwatchai, the secretary-general of the Board of Investment.
“Chinese businesses may consider moving their investments to Vietnam’s neighbours. Thailand and Indonesia now have bright prospects, but Thailand has the advantage of better border linkages with China,” he said
Some Thai businesses were also affected, said Somhatai Panichewa, president of Amata (Vietnam), the Thai industrial estate operator. She said that 17 Taiwanese factories at Amata City Bien Hoa in Dong Nai province in southeastern Vietnam asked to suspend operations for a few days after violence broke out. One Taiwanese factory was slightly damaged by fire.
Moody’s views that what happened in Vietnam will only hurt the region since China is already shifting some production out of Asean and into Africa.
“China’s shift to a more consumption-based economy and the rising middle class will raise the cost of production, forcing businesses to invest abroad,” said Mr Gibson. “This should lift Chinese FDI across the region. Rising production costs in China will force Chinese businesses to outsource production either to neighbouring Asia or Africa.”
ASEAN HOPES
According to Ernest Bower, a senior adviser and the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies, China’s “aggressiveness” is drawing Asean closer.
China has been embroiled in territorial disputes in the South China Sea with Vietnam, the Philippines, Indonesia, Brunei and Malaysia, as well as over uninhabited islands with Japan and on its borders with India.
“Geopolitical risks stemming from the South China Sea disputes pose downside risks to relations between China and the rest of Asia. The degree of risk, however, will depend on how policymakers handle the situation over time,” Mr Gibson says.
However, given rising tensions with China, many analysts believe Asean countries could grow in stature as trading partners of Vietnam, despite signs of declines in the past two years.
Two-way trade with the bloc in 2013 was worth $40 billion, up just 3.5% from 2012, although the growth rate in 2012 and 2013 averaged 17.7%.