Vietnam seeks to slow China inflows

When Vietnam’s ruling Communist Party tabled last year a new law to create three special economic zones (SEZs) that would allow foreign investors to lease land for as long as 99 years, many Vietnamese believed the measure aimed to sell out the country to China.

In response, nationalistic protestors launched the largest anti-China protests seen in years across the country. Local Party headquarters were burned to the ground in some areas of the country, while splits in the Party’s usually collective leadership emerged when then-president Tran Dai Quang appeared to defend protestors vis-à-vis security forces.

While anti-Chinese nationalism is prevalent across Vietnamese society, based on a centuries-old history of suspicion and conflict between the big and small neighbors. But Party apparatchiks are also beginning to seriously question how much Chinese investment the country can absorb without a backlash, and whether unequal trade flows are undercutting upstart local firms.

Last year, in a rare climb down in response to public pressure, the government postponed the SEZ law’s deliberation. Now, as global protectionism picks up amid the US-China trade war, the Party this month again deferred debate on the lightning rod legislation, with National Assembly secretary Nguyen Hanh Phuc saying it’s now not on the legislative agenda in 2019 or 2020.

The Party has likely decided to postpone discussing the SEZ law until after the 2021 National Party Congress, where top leadership and policy decisions are made. It is also possible that the Party has decided to ditch the SEZ plan altogether due to concerns of China’s deepening economic penetration.

While only one of the planned SEZs was to be built near the Chinese border, none of the three were exclusively Chinese orientated. Still, there were already concerns about the SEZs’ economic and financial viability.

The Ministry of Finance estimated it would cost about $70 billion to develop the three SEZs, yet foreign investors were only expected to pony half the capital, leaving the state and private sector to pay the rest.

That, some suggest, represented a potential debt trap risk, similar to criticism of China’s loans elsewhere. Rising public debt, which peaked at close to 60% of gross domestic product (GDP) in 2016, meanwhile has recently prompted the government to curb investment, trim budgets and impose austerity measures. Others doubted whether the initial outlay would pay off in the long run.

Vu Quang Viet, an economist and advisor to a former prime minister, cast doubt in local media interviews on whether the SEZs would attract high-end technology sectors and suggested they would more likely facilitate speculative sectors like property and gambling, which China has notably plowed into in neighboring Cambodia.

Other prominent economists and vocal rights activists suggested the foreign-invested SEZs could exacerbate already tense land rights issues, a major cause of intensifying anti-Party protests across the country that often have links to Chinese investments.

In 2009, nationwide protests erupted over concerns about Chinese businesses mining bauxite in central Vietnam, with some historic Party luminaries airing criticism of the government and its perceived as sovereignty-eroding deals with China.

The area, known for its pristine mountain environment, is also of strategic importance in ongoing sea disputes with China.

Seven years later, nationwide demonstrations erupted after the Taiwanese corporation Formosa Plastics spilled toxic waste into the waters of central Vietnam, destroying the environment and fisheries in several provinces.

Neither of those eruptions, one anti-China and the other anti-Taiwan, the latter likewise viewed as Chinese in Vietnam, caused the ruling Party to backtrack on their foreign investment-promoting policies. But that could be changing with the shelving of the SEZ law, some suggest.

“Anti-China sentiment in Vietnam is toxic. No doubt the party and government were taken aback by the ferocity of the anti-China outbursts last year,” said Carl Thayer, emeritus professor at the University of New South Wales in Australia.

However, Thayer added, “Vietnam’s leaders will continue to stifle internal criticism of China while at the same time promote economic engagement with China. This reflects the Vietnam Communist Party’s long-standing policy of restricting, but not completely censoring, anti-China comments in the domestic media while ‘cooperating and struggling with China’ in their bilateral relations.”

That puts the Party on the horns of a dilemma. As a highly authoritarian state, the Party’s legitimacy depends largely on its ability to maintain economic growth, which is currently among the fastest in the world, as well as its historic role as a nationalist force that threw off foreign colonialism.

In the eyes of the Party’s critics, Vietnam has grown too close to China, a former colonizer and present-day foe over hotly contested territory and features in the South China Sea Beijing is increasingly militarizing.

At the same time, Party policymakers in Hanoi have long recognized the importance of Chinese investment in fueling fast growth. But that may now be changing as political risks rise around perceptions of Chinese dominance.

The decision to delay the SEZ law until 2021 or beyond will certainly be considered a victory by critics of the plan, as well as anti-China nationalists. Yet there is also growing skepticism about Chinese investment among the Party elite and policymakers, who for the first time in recent history appear to be calling for limits on FDI.

That’s being driven in part by the ongoing US-China trade war, which has seen numerous Chinese firms move their operations southwards into Vietnam, one of the few Southeast Asian nations that has benefitted from the superpowers’ spat in terms of increased investment.

The first quarter of this year alone saw Chinese firms invest roughly two-thirds of what they invested in Vietnam throughout the whole of 2017, according to a recent report by Rong Viet Securities Corporation, a Ho Chi Minh City-based advisory firm.

Yet this wasn’t hailed as a victory during the latest session of the National Assembly that began earlier this month, as delegates have questioned whether this influx of Chinese investment is actually a good thing for Vietnam in the long-run.

Nguyen Van Chuong, of Ho Chi Minh City, called for new checks on foreign investment in case Chinese firms bring outdated technology and outcompete domestic firms, local media reported. Another delegate called for new protectionist barriers that would give the government more power to pick and choose which Chinese investments it wants.

Vietnam arguably has wiggle room to be selective, as other foreign investors expand their footprints in the country. Vietnam is currently seen as the most attractive destination in Asia for Japanese investment, according to survey this year by the Japanese news agency NNA.

Japan is now the largest investor in Vietnam, accounting for almost a quarter of the $35.4 billion worth of FDI the country received last year. South Korea, which has been at the forefront of kickstarting Vietnam’s surging tech industry, is also rapidly increasing its investment, especially as Seoul reduces its investments in China.

Samsung Electronics alone has invested some $17 billion in Vietnam, making the country the second biggest exporter of smartphones after China, and making Samsung’s local subsidiary arguably the most profitable business in Vietnam. Samsung saw revenue of $58 billion in Vietnam in 2017.

At the same time, Vietnam is also clamping down on trade with China it perceives as unfair. In particular, Hanoi has questioned the widening trade deficit it has with China, currently worth about $5.2 billion, according to data from the General Department of Customs.

Meanwhile Vietnam’s exports to China continue to fall, slipping 16% in the first two months of this year compared to the same period in 2018, while imports from China rose by 18.6% in the first quarter year on year, Vietnamese customs data shows.

The latest imbalances have been driven by a depreciation of the Chinese yuan, which has fallen by around 9% since the start of the US-China trade war. National Assembly delegates in Vietnam are reportedly now questioning whether to devalue the local dong currency to stop the deficit from expanding.

Concerns about this inequity has been taken up Prime Minister Nguyen Xuan Phuc, who was reportedly assertive enough to tell senior Chinese officials last year: “As Vietnam is seeing a great trade deficit with China, you [Chinese businesses] should import more products from Vietnam, starting with agricultural products, to balance bilateral trade.”

There is little to indicate so far that China has responded to that trade-balancing request. What is increasingly clear is that anti-China nationalism is on the rise in Vietnam, to an extent that popular pressure is causing the one-party government to rethink its broad economic relations with China.

Just as activists and economists criticized the SEZ law for supposedly putting Chinese over Vietnamese interests, a number of Party policymakers are now starting to ask if more Chinese trade and investment is necessarily still in the national interest.