Vietnam Plays Key Role in China-Japan Aid Battle

Posted on March 30, 2015 by

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By Tom Wright and Mitsuru Obe (WSJ, March 26, 2015) — Beijing’s new tack on development is set for a test in a country where backlash is strong.

HANOI, Vietnam—In the battle between China and Japan for economic pre-eminence in Asia, Vietnam is center stage.

Beijing and Tokyo have plied the country with investment and aid, with an eye to building up low-cost manufacturing bases there. Vietnam’s strategic location on oil-transport routes also plays a part.

But China’s growing economic role in Vietnam has faced a backlash which intensified after Beijing last year parked an oil rig in waters Hanoi also claims. Since then, China has sought to win over neighbors with pledges of development funds, and bills a new Asian development bank as a consensus-based approach to aid.

How China’s new tack plays out in places like Vietnam, one of the world’s largest recipients of economic assistance, will be another important factor in the regional rivalry.

aid to VNTokyo has given more aid to Vietnam than to any other country in recent years. In 2014, it supplied around $1.8 billion, building a new terminal at Hanoi’s international airport, and a multilane highway to carry visitors into the capital.

China, too, has rapidly increased its assistance to Vietnam, constructing a series of coal-fired power plants, financed by Beijing’s export bank.

But local politicians and businesses complain the plants regularly break down and that Chinese firms bring in their own workers rather than hiring locals.

The heightened territorial tensions with Beijing after the oil-rig incident added to pressure to rely less on Chinese aid and investment.

“The recent political issues in relations with China are prompting us to diversify,” Do Thang Hai, Vietnam’s deputy trade and industry minister, said in a recent statement.

Vietnam isn’t alone in rethinking how much to welcome a flow of Chinese money. Sri Lanka’s new government this month put on hold work on a $1.4 billion China-backed construction project in Colombo, the capital, citing concerns it had proceeded without necessary government approvals under the nation’s previous regime.

Indonesia, too, has complained about the quality of Chinese-built power plants. And Myanmar’s opening to Western investment was at least partly driven by a desire to scale back what had become a heavy reliance on China as economic sponsor. In 2011, Myanmar suspended the construction of an $3.6 billion China-backed dam project, and last year it delayed a plan to build a high-speed rail connecting the two neighbors.

In response, Japan under Prime Minister Shinzo Abe has made a major push into Myanmar, forgiving billions of dollars in debt and bulking up assistance programs.

Now, Beijing’s efforts to forge a new aid institution is another challenge to Tokyo, which since the 1960s has controlled the Asian Development Bank, a multilateral lender that focuses on infrastructure.

Japan has echoed U.S. concerns that the China-backed Asian Infrastructure Investment Bank will push loans out the door without ensuring environmental and other safeguards.

Recent signals from China, including an offer to forgo veto power at the bank even though it is providing $50 billion in initial capital, have gone some ways to assuage such doubts and brought several European countries on board.

The U.K., in applying to join the lender as a founding member, said it wanted to forge opportunities for companies in a fast-growing region, an acknowledgment of China’s growing influence.

Beijing’s overseas aid totaled $7.1 billion in 2013, the sixth-largest commitment globally, behind the U.K., the U.S., Germany, France and Japan, according to a study last year by researchers at the Japan International Cooperation Agency, which oversees Tokyo’s foreign assistance.

A recent Chinese government report, the first to give some level of detail on its opaque aid program, said it had provided $14.4 billion in foreign assistance between 2010 and 2012.

China’s aid is now likely comparable in size to Japan’s, making it a major donor in Asia, a region the U.S.’s economic-assistance program has largely bypassed in recent years, with Washington sending much of its economic aid instead to Afghanistan and Pakistan.

Until the late 2000s, Japanese, European and U.S. firms played a major role in building power plants in Vietnam. Then, Chinese state-owned companies came in, backed by cheap financing from Beijing. Japanese businesspeople say that allowed the Chinese to construct plants at a third the cost.

Chinese firms have built about two-thirds of the 19,000 megawatts that Vietnam has added to its grid since 2007, estimates Kazuyoshi Kume, a senior manager involved with Mitsubishi Corp.’s power-plant business in Vietnam.

Many Chinese plants have faced quality issues, including running below full capacity, said Nguyen Quoc Truong, an official researcher at Vietnam’s Ministry of Planning and Investment, which awards power-plant contracts.

“Chinese suppliers don’t really meet our standards,” he said.

For now, Japan is viewing Vietnam’s caution toward Chinese aid as an opportunity.

Before the oil-rig incident, Japanese firms had assumed a Chinese company would win the contract to build a 688-megawatt coal-fired power plant at the Duyen Hai complex on its southern coast. Instead, Vietnam handed the contract in November to Sumitomo Corp. of Japan.

“There’s a growing voice…to be much more independent of China,” said Hiroshi Fukuda, Japan’s ambassador to Vietnam, in an interview. He said Tokyo was working to strengthen its diplomatic ties with Hanoi.

“What we’re starting to see now is that countries don’t want to become too reliant on economic support from China,” said Philippa Brant, a China aid expert at the Lowy Institute for International Policy. “The reality is China’s aid isn’t inherently better.”

China’s Embassy in Hanoi and the finance ministry in Beijing didn’t respond to requests for comment. Attempts to reach the Export-Import Bank of China, which oversees concessionary lending, weren’t successful. Beijing has said it hopes its new lender can work alongside existing organizations to help build Asia’s infrastructure.

Vietnam is making other adjustments following the oil-rig incident. The country imports a majority of its fertilizer needs from China, but in 2014 imports fell by 20% from the previous year, with significantly more coming from Russia and Taiwan.

In January, Japan’s Itochu Corp. said it was taking a stake in Vietnam’s largest state-owned garment producer. One of the goals of the tie-up is to develop Vietnam’s industry, which currently relies on around $3 billion in annual imports of fabric from China.

Still, China is expected to continue to play a significant role in Vietnam’s development, not least because it has a large aid budget and can construct infrastructure more cheaply, Japanese officials say.

In coming weeks, China and Vietnam plan to connect new highways which will slash traveling time between Hanoi and Kunming in southern China and facilitate trade.

Despite wariness about China, said Kenichi Yamamoto, deputy chief in Hanoi of the Japan International Cooperation Agency, “the government knows they have to have a close relationship.”

Posted in: Vietnam Economy