Anti-China riots most damaging to Vietnam’s economy

Source: CNN

Anti-Chinese sentiment is reaching fever pitch in Vietnam. At least twenty have been killed and hundreds injured as Beijing evacuated some 3,000 workers from the country. This marks a sharp escalation that will have profound impact on the Vietnamese economy.

Since China’s deployment of a state-owned oil rig near the disputed Paracel Islands, a wave of anti-Chinese nationalism has swept the country, leading to widespread protests and attacks on businesses perceived to be Chinese.

The riots broke out at the Taiwanese-owned Formosa Plastics factory in central Ha Tinh province, and in a number of industrial parks near Ho Chi Minh City. Approximately 20,000 Vietnamese participated in the violence. Rioters appear to have targeted factories with any Chinese characters on them – about 460 factories across the country reported damage. With at least twenty dead and the looming spectre of further violence, hundreds of Chinese workers have fled HCMC’s industrial parks to neighbouring Cambodia.

This is a worrying and potentially derailing turn of events in the countries’ long-running dispute. Chinese investments in Vietnam are immense, supplying Vietnam with one-fourth of the raw materials used by its factories. Chinese-funded megaprojects have proliferated in Vietnam, including railways, highways, and controversial bauxite mines. Chinese FDI hit roughly $2.3 billion in 2013, mainly directed toward the real-estate and textile industries.

If Beijing is looking to hit Vietnam economically, it need only begin suspending state-run commercial operations. The evacuation of Chinese workers likely marks the beginning of this economic pressure.

Politically, the riots have achieved nothing. The chances of China suddenly withdrawing its oil rig are extremely small. As People’s Liberation Army Chief of General Staff Fang Fenghui made clear in his Washington visit, Beijing will continue to drill and will make no concessions on sovereignty issues. If anything, the deaths of Chinese citizens will only inflame the Chinese public and lend credence to Beijing’s claims of Hanoi’s inability to control the anti-Chinese sentiment in Vietnam.

Vietnam stands to be the clear economic loser in the aftermath of the riots. The Vietnamese economy is heavily dependent on foreign investment – 46 percent of the country’s industrial output in 2012 was from foreign-owned industries. While China is not Vietnam’s biggest foreign investment source, frenzied rioters have shown that they make little distinction between Chinese, Taiwanese, Malaysian and Singaporean businesses.

Beyond the foreign-owned production facilities that suffered physical damage, untouched facilities – including suppliers to toy giant Li & Fund, Adidas, and Nike – have also suspended production for at least a week.

Vietnam had been left well-placed to reap the rewards of rising labour costs in China. However, the threat of mob violence and a decidedly anti-China atmosphere will cast doubts in the minds of potential investors not only from mainland China, but also from Hong Kong, Taiwan and Singapore.

Beijing has already learned how damaging nationalist riots can be, when, following the Japanese nationalisation of the disputed Senkaku/Diaoyu islands, Chinese mobs attacked Japanese cars, factories and restaurants. Japanese investment in China has since plummeted, shifting instead to ASEAN countries.

The risk of outright conflict between the two countries remains low, but there is still a possibility of escalation given Vietnam’s long history of animosity towards China. Much to the excitement of the Chinese, Vietnamese President Truong Tan Sang’s failure to rally ASEAN to his cause at the group’s annual summit dealt a blow, as Hanoi had sought to present a united regional front to China. And unlike the Philippines and Japan, which both have bilateral security arrangements with the United States, Vietnam’s lack of powerful international allies will dampen Beijing’s reluctance to use hard power.

Hanoi’s failure to rein in rampaging mobs stands only to hurt the country. It denigrates regional support for Hanoi’s legitimate maritime claims, and substantially heightens the risk for escalation. If nationalist violence continues, Vietnam can expect to see its attraction wither away, as investors and tourists look to safer locales.

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Categories: Pacific Asia, Politics

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