Vietnam – Courting China

When the governing CPV held its 12th five-year National Congress in January 2016, the ruling party affirmed its commitment to pursuing closer relations with the US, which figured centrally in the government’s economic development strategy and the protection of Vietnam’s interests in the face of an aggressive push by China to firmly establish its political and economic hegemony in Asia. However, barely a year later, there has been a distinct shift in attitude on that score, which is directly tied to the election of Donald Trump as the US president, and, more specifically, Trump’s decision to withdraw the US from the 12-nation TPP.
Vietnam stood to benefit perhaps more than any other participant in the TPP, in terms of the potential of the agreement to produce a rapid and sustained surge in both trade and foreign investment. However, with the entire project looking like a dead letter, and the new administration in Washington showing no interest in pursuing a bilateral FTA with Vietnam (or any other nation, for that matter), the US has forced the reformist elements within the CPV to reconsider their strategy. With the Beijing-led RCEP, a proposed free-trade area encompassing the 10 member states of ASEAN and six major non-ASEAN nations in the region, being pursued as Hanoi’s Plan B, the political initiative has at least temporarily shifted to the more conservative, pro-China faction of the governing party that is represented in the hierarchy by General-Secretary Nguyen Phu Trong.
There is little immediate danger that Vietnam will move rapidly into China’s embrace, or that the government will abandon its broader strategy of gradual but steady liberalization of the economy. Indeed, political leaders will need to proceed with care in developing a closer relationship with Beijing, lest they fan the flames of anti-Chinese hostility among a Vietnamese population that is resentful of China’s assertions of sovereignty over much of the South China Sea.
For his part, Prime Minister Nguyen Xuan Phuc is promising to expand opportunities for foreign firms in the banking sector and to increase foreign access to the local securities market. There are no precise details, but raising the current 30% maximum foreign shareholding in banks will no doubt draw interest, although the same problems the government hopes to address by expanding foreign participation, including low capitalization and a high ratio of non-performing loans, will reduce the attractiveness of many potential assets.
Vietnam received a record $15.8 billion of inward FDI last year, and its advantages as a cheap manufacturing location with an improving investor framework will continue to attract foreign firms. Economic indicators remain favorable and are pointing to continued robust growth over the medium term, barring a broader regional downturn; the possibility of a damaging trade war between the US and China is a notable risk in that regard.
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