The region’s leaders will follow tradition in seeking to limit fallout from the demonstrations over the placement of a Chinese oil rig in disputed waters off Vietnam’s coast, because of the cost of letting disputes bleed into trade and business, according to HSBC Holdings Plc and CIMB Group Holdings Bhd.
Despite recurring disputes over contested areas of the South China Sea, last year China was the largest trading partner of the 10-member Association of Southeast Asian Nations, with Asean importing more from the region’s No. 1 economy than it exported to it. Vietnamese officials were quick to crack down on the protests that began May 11 and the local government said this week it would exempt companies that faced damages in the violence from land rental charges as thousands returned to work.
“The economic relationship has continued to prosper despite potential hiccups in the political relationship, and one would expect it to remain the case simply because of the proximity of China and the vitality of the Chinese economy,” said Frederic Neumann, the co-head of Asian research at HSBC, speaking of ties between China and Southeast Asia. “Policymakers in Asia take a very pragmatic approach when it comes to economics and don’t always let politics interfere with economic decision-making.”
Metallurgical Corp. of China, a state-owned engineering company, said yesterday that four of its workers were killed in an attack in Vietnam on May 14, bringing the confirmed death toll from the anti-China protests to six.
Trade between Vietnam and China, its largest trading partner, rose 20.7 percent in April, the third-biggest gain among China’s major trading nations. The dispute over the rig near the Paracel Islands reflects a renewed chill between the two Communist nations after efforts to draw them closer together, including a flurry of official visits last year.
Vietnam Prime Minister Nguyen Tan Dung directed agencies to delay collecting taxes for up to two years from companies that reported damage in the riots, the government said in a statement on its website today. The nation will reduce import, export and special consumption taxes for the companies as well as supply workers to those in need of employees after the riots, the government said.
Code of Conduct
In the neighboring Philippines, President Benigno Aquino said this week China violated the 2002 declaration on conduct in the South China Sea with its reclamation efforts in the disputed Johnson South Reef. Yet, trade between the two countries rose to $3.39 billion in April and Trade Secretary Gregory Domingo said in October China will probably overtake Japan and the U.S. to become his country’s largest export market.
In Thailand, the military has intervened after political unrest that has persisted for six months and contributed to the economy contracting in the first quarter of 2014. Thailand’s army declared martial law nationwide yesterday, putting soldiers on the streets and calling on protesters from across the political spectrum to stand down.
Asean leaders meeting in Myanmar on May 11 issued a statement expressing concern about South China Sea tensions, without referencing China directly. The grouping has maintained a policy of neutrality on the disputes. “China will have one version of the events, Vietnam will have one version of the events. We don’t need to get into that,” Singapore’s Foreign Minister K. Shanmugam told reporters in Myanmar on May 10.
Trade in goods is so interlinked that the cost of taking punitive action such as sanctions is too high, said Santitarn Sathirathai, head of economics for Southeast Asia and India at Credit Suisse Group AG in Singapore. “That’s not the way Asean, Asia in general, does it.”
China’s President Xi Jinping is expanding the country’s naval reach to back its claims to the South China Sea that are based on the “nine-dash line” map, first published in 1947. That claim extends hundreds of miles south from China’s Hainan Island to equatorial waters off the coast of Borneo. China and Vietnam both claim the Paracel Islands, and Asean members Brunei, Malaysia and the Philippines have claims to other areas.
Asean leaders have called for progress on a code of conduct with China that would seek to preserve freedom of navigation in the South China Sea, through which some of the world’s busiest shipping lanes run. Talks have made little progress since China agreed in July to start discussions, with China introducing fishing rules in January requiring foreign vessels to seek permission before entering waters off its southern coast.
“They know that it’s going to be to no one’s benefit if any one of them were to push this issue further, whether it’s with China or with neighboring Asean members,” said Song Seng Wun, a Singapore-based economist at CIMB. “There is that umbilical cord that, if severed, will have repercussions beyond just the shores of Asean and China.”
While Asean is dependent on China’s 1.4 billion population for consumers of its exports, China also relies on Southeast Asia for investment. Foreign direct investment from China to Asean was $5.74 billion in 2013, compared with the $8.35 billion Asean economies invested in China.
Despite concern that anti-China riots in Vietnam will deter investment in the country, foreign investors were net buyers on the Ho Chi Minh City Stock Exchange every day since April 18, the longest stretch of purchases since January, as valuations fell to a four-month low. They added about $93 million to their holdings even as the benchmark VN Index slumped 8.8 percent through May 16. The index rose 0.6 percent as of 1:17 p.m. local time, heading for its fourth daily gain.
“Asean as a region is particularly vulnerable to a China hard landing scenario due to the rapid growth in bilateral trade and investment with China,” Rajiv Biswas, IHS Global Insight’s Asia-Pacific chief economist said in a statement today. “Asean nations are increasingly integrated into the East Asian manufacturing supply chain.”
Dung responded to the attacks on factories operated by companies from Taiwan and Singapore by instructing provincial governments and security forces to take “quick actions” to stop the violence and prevent protests. The Binh Duong government will exempt protest-damaged companies from land rental charges, Vietnam’s official state television reported, citing Le Thanh Cung, chairman of the provincial People’s Committee.
“Despite the occasional political tensions, the economic relationship between Asean and China has strengthened enormously in recent years,” said HSBC’s Neumann. “I think these two economic blocs will probably grow closer economically over the coming decade as well.”
To contact the reporter on this story: Sharon Chen in Singapore at firstname.lastname@example.org