Category Archives: China-Vietnam

China Will Need Stimulus To Hit New 5.5% GDP Growth Goal

China's annual GDP growth (%), 2002-2022

CHINA HAS SET a GDP growth goal of around 5.5% for this year, a target that suggests more stimulus is likely given the headwinds from the housing market slump, the zero-Covid tolerance policy and global risks, notably the fallout from Russia’s invasion of Ukraine.

The growth goal, announced by Prime Minister Li Keqiang as part of his work report to the National People’s Congress. is the lowest in more than 30 years.

It is on Beijing’s long-term glide path to get the economy to a sustainable level, but also reflects the slowing momentum of the economy’s post-pandemic recovery.

Li’s comments at the opening of the congress suggest the central bank will cut interest rates modestly but repeatedly.

The work report also said that the budget deficit will be narrowed to 2.8% of GDP this year from last year’s target of around 3.2% and that there is a goal of adding more than 11 million urban jobs in 2022 to keep the unemployment rate under 5.5%.

The target inflation rate is around 3%, and stability remains a high priority. Increased spending by local governments is a likely channel of stimulus, with a total of 3.65 trillion yuan ($580 billion) in new special local government bonds to be sold this year, the same as last year, suggesting more infrastructure investment to sustain growth.

President Xi Jinping will want to go into the Party Congress later this year, when he is expected to be confirmed for an unprecedented third term, with a stable economy. 

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South Korea Draws Vietnam Into Its Orbit

Chart showing value of South Korea's exports to and imports from Vietman, 1991-2019

FOR CHINA’S NEIGHBOURS, trade and investment relations with each other gain importance as Beijing deepens its involvement in regional trade arrangements. Those between South Korea and Vietnam are a case in point.

South Korea is now a larger foreign investor than China in Vietnam. In raw numbers, more South Korean firms do business there than in China, though they are mainly small and medium-sized enterprises.

For the giant South Korean conglomerates, Vietnam has become an important link in their supply chains. Witness that electronic components such as semiconductors and displays accounted for 89% of Vietnam’s exports to South Korea in 2019 (the latest full-year figures available).

The two have different histories with China and some uneasy mutual history dating back to the Vietnam and Korean wars. Trade did not start to blossom until Hanoi and Seoul established diplomatic relations in 1992. As our chart shows, it bloomed after they signed a bilateral trade agreement in 2015.

Vietnam, with an 8.9% share of the total trade (again on the 2019 data), is South Korea’s third-largest trading partner after China (25.1%) and the United States (13.5%). It ranked third as an export market, again behind China and the United States, worth $48.5 billion, and fifth for imports ($21 billion) after China, the United States, Japan and Saudi Arabia.

It is also South Korea’s fastest-growing trade partner, with trade having expanded by half as much again in the three years to 2019. The two nations are looking for bilateral trade to top $100 billion by the year after next.

On the services side, pre-Covid, Vietnam became a major tourist destination for South Koreans, with visitor numbers rivalling those coming from China.

On the investment side, as mentioned above, South Korea is Vietnam’s largest foreign investor. More than 9,000 projects, worth upwards of some $70 billion, account for 18% of Vietnam’s total foreign direct investment (FDI). Like China, Vietnam offers South Korea’s conglomerates political stability, reasonable geographical proximity, cultural familiarities and cheap, educated labour for manufacturing. Samsung, for example, makes a lot of smartphones there.

The country will remain attractive to South Korean investors despite rising costs and the supply chain headaches now being experienced due to Hanoi’s hapless handling of the Delta variant. Vietnam’s growing popularity with foreign investors, including non-South Korean firms looking for supply chain alternatives to China under what is now being called ‘strategic decoupling’, is putting pressure on the country’s rents, ports and infrastructure. Skilled labour is growing harder to hire and consequently and more expensive.

The tension between China and the United States, which is the backdrop to the growing trade and investment relationship (and defence co-operation) between South Korea and Vietnam, means there is always a risk of blowback against US allies. That is more of a concern for South Korea than Vietnam. South Korean firms well remember the state-inspired consumer boycott against them five years ago to express Beijing’s displeasure at Seoul allowing the installation of a US anti-missile system.

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Yongxing And Submarine Protection

Yongxing, Sansha prefecture, or Woody Island, in the Paracels archipelago in the South China Sea

CHINA HAS BEEN on Yongxing, known as Woody Island to most of the rest of the world, since Mao’s troops landed on the then unoccupied island in 1956. Woody is part of the Parcels, the closest of the South China Sea archipelagos to the Chinese mainland, and had previously been occupied by French Indochina, Japan and Nationalist China.

As the image above shows, Woody Island today has been extensively built up for a speck of land in the middle of the South China Sea. It has a hospital, library, school and sports fields as well as a military garrison and airport. ICBC and China Telecom both have branches there. The permanent civilian population numbers more than 1,000.

Beijing administers all its claimed land and waters in the region from the Sansha City prefectural government office that was set up on Woody in 2012. The city office is the building with the silvery dome on the right-hand side of the picture.

Vietnam, which calls Woody Island Phi Lam Island, and Taiwan also have territorial claims derived from previous occupants. Reports that the PLA has deployed two HQ-9 surface-to-air missile batteries on the island lend credence to the notion that Beijing is gradually stepping up its militarization of the contested waters of the South China Sea.

Last year, it flew J-11 military jets onto the island, whose airstrip is capable of landing China’s fourth-generation military aircraft. At the same time, it is believed that the newest nuclear submarines that China is building will be based at the PLA-Navy’s Yulin base on Hainan Island only 400 kilometers away and where there are underground pens for some 20 submarines as well as space to dock an aircraft carrier.

Woody could serve as a forward defense base for Yulin should it come to an air attack on the base. Yulin is of increasing strategic important as it offers a quicker route to the deep water passages to the Pacific than the PLA-Navy’s northern Xiaopingdao base. The PLA-N needs that rapid blue-water access if its subs are to be a credible second-strike nuclear deterrent.

The HQ-9 is a medium-to-long-range anti-aircraft missile that can be launched from the back of a heavy-duty military truck on land as well as from a destroyer at sea. An HQ-9 land-based battery would have accompanying power generation and radar trucks, the radar being capable of detecting both low altitude and stealth targets.

The arrays seen in the satellite images taken last weekend that have caused the latest stir are positioned to defend the approaches to Yulin.

The initial reports came from the Taiwanese defense minister, with the commander of the US Pacific Fleet subsequently confirming them to the Reuters news agency, saying it represents “a militarisation of the South China Sea” in ways China’s President Xi Jinping had pledged not to make.

China, for its part, says it has every right to deploy limited defences on its own territory and that that has nothing to do with militarisation of the South China Seas.

HQ-9s, though, are highly mobile weapons systems; they could be taken on or off the island by ferry at any time, or just driven into a storage shed.

Their presence on Woody doesn’t likely have great significance in itself. They are not as provocative there as they would be if rolled out on any of the artificial islands being built in the Spratlys. China vacillates in the South China Sea between asserting its claims and ensuring a belligerent stance does not trip over into live hostilities.

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South China Sea Territorial Waters: Ne’re The Twain Shall Meet

IT HAS BEEN a couple of years now since China abandoned its policy of asserting its territorial claims in the South China Sea primarily by way of commercial fishing. Instead it has sent in its oilmen.

State-owned China National Offshore Oil Corp. (CNOOC) started drilling in the disputed waters in May 2011. Later that year it cheekily invited bids from foreign oil companies to join it in the exploration and development of nine blocks off the Vietnamese coast. The current standoff between China and Vietnam over the arrival of CNOOC’s deep-sea oil rig in what Vietnam says is its 200-mile exclusive economic zone and Beijing claims is only 20 miles off the coast of one of its islands, is only the latest development in a series stretching back to then.

Drilling rig HD-981 was China’s first home-developed deep-sea rig, and built to drill in those waters. It has been searching for the 23 billion-30 billion tonnes of oil and 16 trillion cubic meters of natural gas believed to lie beneath the South China Sea — equivalent to one-half of China’s existing onshore oil and gas reserves.

It is first place of operation was some 300 kilometers southeast of Hong Kong between the Paracel Islands, claimed by China as the Xisha Islands and Vietnam as the Hoàng Sa Archipelago, and the Macclesfield Bank, claimed by China as the Zhongsha Islands, and Taiwan. Not too far away lies the Scarborough Shoal (Huangyan Island), scene of repeated maritime stand-offs between China and the Philippines, which calls it the Panatag Shoal. Earlier this week, Philippine authorities detained a Chinese fishing boat and its 11 crew members near the Spratly Islands, which China calls the Nansha Islands.

HD-981 is now deployed some 30 kilometers off one of the specs of rock in the Paracels and some 280 kilometers from the Vietnamese coast, which would put it 100 kilometers inside the exclusive economic zone Vietnam claims. The maritime argy-bargy has been matched by the diplomatic jostling. China has called for Vietnam to stop “disturbing” the operations of Chinese companies; Vietnam, for its part, has accused the PLA-N of intimidating Vietnamese vessels. Japan’s Foreign Minister Fumio Kishida has been told to butt out of it after saying China’s actions in the region were “provocative”.

What is concerning to This Bystander is the large number of Chinese and Vietnamese vessels that have reportedly been involved, 40 on the Chinese side, 20 from Vietnam, with several warships in both flotillas. For Beijing’s part. this appears to be a response to U.S. President Barack Obama’s recent visit to East Asia in which he reaffirmed the U.S.’s commitment to its Asian treaty allies. If Beijing feels those nations have been stiffened by U.S. reassurances, it may feel it needs to demonstrate its own robust response. That could leave these disputed waters more troubled than they been been in recent years.

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China Said Holding 21 Vietnamese Fishermen

China and Vietnam are engaged in a new war of words over disputed territorial waters in the South China Sea. Twenty one Vietnamese fishermen have been detained since March 3 while working off the Paracel Islands (Xisha to the Chinese and Hoang Sa to the Vietnamese) which both countries claim. China says Vietnam’s government should halt the fishing off the Paracels to stop what Foreign Ministry spokesman Hong Lei described as illegal fishing operations by “a large number of Vietnamese fishing ships”. Vietnam insists the fishermen were in Vietnamese waters and should be freed.

Beijing has been beefing up its naval presence in the South China Sea. The Maritime Surveillance Force conducted three times as many missions there last year as in 2008. As well as fishing boats, the vessels were looking for oil and gas drilling, activity off the Spratlys that Beijing also holds to be illegal in what it considers its waters.

As well as China and Vietnam, the Philippines, Malaysia, Brunei and Taiwan all claim sovereignty over often overlapping parts of the South China Sea. China’s claim is the largest, covering a big U-shape over most of the sea’s 1.7 million square kilometers, straddling shipping lanes between East Asia and Europe and the Middle East and below which are believed to be rich oil, gas and mineral deposits.

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Diplomonkish Protest

Monks are an inflammatory issue for Beijing right now. Hence Vietnam’s decision to dispatch six of them to take up six-months of residency on the disputed Spratly Islands in the South China Sea–China calls them the Nansha Islands–is a doubly provocative act.

The sextet will take charge of Buddhist shrines on the sparsely inhabited islands that were abandoned in the mid-1970s, but which Vietnam has recently refurbished, the BBC reports. The Philippines, Brunei, Malaysia and Taiwan, as well as China and Vietnam, claim sovereignty to parts of the islands to establish their claims over the resource-rich waters around them. The BBC has a map of the competing maritime boundaries here.

No official response from Beijing yet, but if and when it comes it will surely be to reaffirm its  “indisputable sovereignty” over the islands. Late last month it condemned a plan by Manila to invite foreign investors to explore for oil and natural gas in the area in just such terms.

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Muscle Flexing In The South China Sea

The dispatch of the Haixun-31 patrol vessel into the South China Sea is blatant muscle flexing, despite its overt purpose of making a routine trip to Singapore for a six-day visit. The vessel, seen above sailing from Zhuhai on Wednesday,  is one of the largest and most modern in the Maritime Safety Administration’s fleet. Its voyage comes two days after Vietnam staged a live-fire exercise in the much disputed waters, criticized by Beijing for being a show of force.

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More Choppy Waters In China Seas

It is getting petulant again in the resource-rich waters of the East and South China Seas.  Tokyo has protested to Beijing about a Chinese helicopter buzzing a Japanese destroyer close to a disputed natural gas field the East China Sea. Last week, Chinese boats allegedly tried to ram a Philippines ship doing seismic testing for natural resources in the South China Sea. Last month, Vietnam complained about Chinese naval exercises near the Spratly Islands, also in the South China Sea. Last year, Tokyo and Beijing has a serious stand-off over the arrest of a Chinese trawler captain who clashed with Japanese coastguards near a group of disputed islands known as the Senkakus in Japanese and the Diaoyus in Chinese.

These incidents do nothing to diminish the concerns of China’s regional neighbors about Beijing’s build up of its navy and growing willingness to flex its muscles in the waters off its shores. We have been expecting Beijing to be repeatedly testing how far it can push its neighbors and we see little reason that that won’t continue. The next level of this will be a coordinated response from the neighbors (and closer cooperation with Washington), ratcheting up tensions even more.

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Unintended Consequences Of Yuan Revaluation

Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.

It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.

In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.

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