As China row smolders, Vietnam rethinks its business plans

As China row smolders, Vietnam rethinks its business plans

A train from Vietnam’s border with China pulls up at a station in Hanoi as dawn breaks, ready to unload goods for trade at what was for years the capital’s most bustling wholesale market.

The freight load is smaller than it used to be, as is the crowd of traders awaiting its arrival. Chinese goods, they say, are increasingly unpopular among their customers now the two countries are locked in a bitter diplomatic row.

“No one buys Chinese products anymore,” said Le Thang Loi, who runs a shop in Hanoi selling household goods. “I’ve switched over to sell Vietnamese and Thai things since last month.”

Vietnam’s testy but economically vital ties with its fellow neighbor have soured since early May, when Beijing moved a $1 billion oil rig unannounced into a stretch of the East Vietnam Sea that Hanoi claims is its exclusive economic zone. It prompted protests that degenerated into riots targeting Chinese factories in an unprecedented outpouring of anger.

The rig was moved on July 16, but the wounds are festering. The row has not only deepened mistrust of China, but increased awareness in Vietnam that its $171 billion economy is exposed, and at risk of being held hostage by Beijing at any time.

Over-dependency on trade with China will be hotly debated within the politburo of Vietnam’s Communist Party, experts say.

Trade with Beijing was worth $50 billion last year and any interruption to that could badly hurt Vietnam, while inflicting little damage on China. Thirty percent of Vietnam’s imports last year were from its neighbor, worth $37 billion, equivalent to just one percent of Beijing’s total exports.

China imports 40 percent of Vietnam’s total rice and rubber shipments each year and accounts for 25 percent of tourist arrivals, which have plummeted lately.

A Grant Thornton survey of 18 hotels in Vietnam showed 15,000 nights were canceled from early May to early July, a loss of $1.8 million. Thirteen of 19 daily flights from China to the beach city of Danang were suspended, according to the local government, which said Chinese tourist arrivals there fell 85 percent in May and June year-on-year.

Nguyen Duy Thanh, 31, a Chinese-speaking tour guide at Vietravel in Hanoi, has had no work since May and is worried Chinese tourists will steer clear of Vietnam.

“I’ve started learning English now to find other work with Western tourists,” Thanh said.

Losing the thread

Vietnamese companies got a taste of what they could expect from investors if strained diplomatic ties with China threaten economic relations in the early days of the rig row.

With anger in Vietnam running high a day after Chinese vessels were accused of deliberately ramming its ships in the disputed waters, investors turned tail, and the main stock index suffered its biggest ever one-day fall – a 6 percent drop on May 8.

Some economists reckon the effects of the dispute could trim 1 percent off this year’s economic growth, which the government has targeted at 5.8 percent.

In terms of foreign investment pledges in Vietnam, China is not committing too much financially. Government data ranked China eighth in the first seven months of this year with pledges of $177 million, compared with $2.4 billion from South Korea and $643 million from Japan.

But, Vietnam’s manufacturing sector, a big employer and economic driver, is heavily dependent on Chinese materials, with 70 percent of cellphone components and a quarter of electrical equipment from its neighbor, according to Vietnam Customs.

A game-changer could be the Trans-Pacific Partnership (TPP) that’s been under negotiation since 2009, as China is not among the dozen countries involved in talks to form a trade pact that would cover a third of global trade.

The incentives offered by the TPP are persuading Vietnam’s bigger firms to reassess their strategy.

Vietnam’s textiles industry, worth $18 billion last year, stands to become more competitive than China, the biggest garment exporter to the U.S. market, once the TPP kicks in.

For Vietnamese textile firms it would mean shifting away from large imports of Chinese fabrics, as U.S. negotiators are insisting on “yarn-forward” rules for garments, requiring materials to be locally made, or sourced from other TPP member countries.

Viet Duc garment factory in Binh Duong province, for instance, last month took out a 100 billion-dong ($4.7 million) loan to invest in machinery to make its own threads and fabrics and break the dependency on imports, according to Nguyen Ngoc Tam of Mekong Housing Bank, which issued the loan.

State-run Vinatex plans an initial public offering in September to fund its ambitious $1 billion expansion, including facilities to make its own materials, according to state media. Vinatex declined several interview requests by Reuters.

The timing of TPP could prove fortunate for Vietnamese firms who have been given a wake up call over their uncomfortable reliance on China.

“Vietnamese businesses often think in very short terms,” said the manager of a foreign garment company in Vietnam, who requested anonymity. “I hope they’ve now learned a lesson from this conflict with China.”

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