China Aggression Sounds Wake-Up Call for Vietnam Makers

For more than eight years, Luong Thi Kim Oanh bought cases of thread from China for her garment factory in Hanoi. Last month, rattled by an anti-China riot in her country, she placed her first order from South Korea.

“I used to buy 90 percent of my thread from China,” said Oanh, 52, who employs about 200 people at Viet Hung Garments & Embroidery. “Shifting sourcing may cost us more, but we need to think of it now, or it may be too late. You never know how things may turn out.”

Oanh fears a further disruption in trade after last month’s violent protests following China’s placement of an oil rig in disputed waters. The unrest halted production at foreign-owned factories and caused Chinese workers to flee. While China is the nation’s largest trading partner, Vietnam must reduce its dependence and develop a contingency plan to cope with any “hiccups, turbulence,” Vietnam Chamber of Commerce and Industry Chairman Vu Tien Loc said this month.

More Vietnamese businesses may have to consider alternatives as the country prepares to file a legal suit challenging China’s claims to the disputed waters. Prime Minister Nguyen Tan Dung said in an interview last month that his administration had prepared evidence and was ready for legal action against the world’s second-largest economy.

“It will force Vietnam’s businesses to look into other markets where the political risk is absent, and that’s a good thing,” said Chua Hak Bin, a Singapore-based regional economist at Bank of America Corp. “It’s always good to diversify, anyway. You don’t want to rely too much on another country, especially where political tensions are escalating.”

Spare Parts

The Vietnam Textile and Apparel Association has asked its more than 1,000 members including Oanh to consider alternative supply sources to China, according to Deputy General Secretary Nguyen Van Tuan, even as bilateral trade between the two countries rose 84 percent to $50.2 billion last year from $27.3 billion in 2010, according to government data.

About 31 percent of Vietnam’s exports to China last year comprised agricultural products, while apparel and footwear made up 13 percent, trade ministry data showed. Forty-two percent of imports from China were telephone components, electronic spare parts, and fabric and leather for garments and footwear, with tools and machinery making up 18 percent.

Vietnam’s policy makers are trying to bolster an economy that the World Bank estimates will grow 5.4 percent this year, slower than an official target of 5.8 percent. The government is studying the impact of the tensions, and will closely monitor sectors that may be affected, including trade, infrastructure development and tourism, and take “suitable actions”, Deputy Prime Minister Nguyen Xuan Phuc said June 12.

Tourists Slide

Vietnam’s Transport Minister Dinh La Thang said he has not seen any indication of Chinese companies pulling back on investment in the Southeast Asian nation, even as the South China Morning Post reported June 9 that state-owned firms have been told to temporarily halt bidding for Vietnam contracts.

Chinese tourists, who made up 29 percent of international visitors to Vietnam in May, fell 10 percent from April, according to the tourism department.

“There is no doubt that economic growth will be affected,” said Le Dang Doanh, a Hanoi-based economist and former government adviser. “The question is how much, 0.5 or 1 percentage point. It’ll depend on how we cope with the impact.”

The benchmark VN Index has slipped almost 5 percent in the past three months. It closed little changed today. The dong has weakened 0.6 percent against the dollar this year.

Asean Community

Vietnam isn’t the only country in the region that China has clashed with. China, which controls the bulk of global rare-earth supply, in 2010 turned off the tap for Japan and imposed a de facto ban on exports to the nation after the captain of a fishing boat involved in a collision with Japanese Coast Guard boats was detained. Anti-Japan protests sparked by a territorial dispute in 2012 hurt carmakers including Honda Motor Co. and Toyota Motor Corp.

Outbound investment by China fell 10.2 percent in the January-May period from a year earlier, data today showed. China’s growing assertiveness has spurred Japan to turn its attention to Southeast Asia and pledge billions of dollars of investment.

Vietnam stands to benefit from the Trans-Pacific Partnership that would cover an area with about $28 trillion in annual economic output and excludes China. Vietnam would also gain from an Asean Economic Community planned for 2015. It has already seen overseas makers of apparel, footwear and electronics set up factories, spurring a six-fold increase in foreign direct investment to $8.4 billion in 2012 from $1.4 billion in 2002, according to World Bank data.

‘Urgent Message’

The tensions between Vietnam and China in the South China Sea are “a wake-up call” for Vietnamese leaders to hasten the diversification of the country’s supply chains and development of domestic industries that can feed critical raw materials to the country’s factories, said Trinh Nguyen, a Hong Kong-based economist at HSBC Holdings Plc.

“If push comes to shove, Vietnam can adapt,” said Alan Pham, Ho Chi Minh City-based chief economist at VinaCapital Group, Vietnam’s biggest fund manager that oversees about $1.6 billion of assets. “It’s an urgent message that Vietnam should take measures to lessen its economic dependence on China. It’s never good to put all your chips on one country.”

At Vinamit JSC, a dried-fruit and vegetable producer that had about 80 percent of its overseas sales going to China, Chief Executive Nguyen Lam Vien has visited potential buyers in Malaysia and other nations since tensions flared. In Bac Giang province, north of Hanoi, authorities are helping local lychee growers to identify markets other than China, their main buyer for years, according to the provincial website.

“We’ve been selling most of our products to China for years,” said Nguyen Van Hung, whose family business has been exporting 90 percent of its output to China. “But this year, we are trying to ship to other markets such as Japan and South Korea, not just China.”

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