Resources, relations and free trade: How China is opening up its borders to Vietnam

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This is the first in a series of articles that looks at China’s borders. As China has grown in the last 30 years, so have the often complicated relationships it has with its many varied neighbors. In this article, we take a look at Vietnam.

By Joyce Roque

Dec. 10 – If East Asian growth figures were translated into basketball terms, China would clearly be its towering center with Vietnam hovering not far behind as its nimble point guard with 10.8 percent and 8.2 percent growth figures respectively slated for 2008, according to the World Bank.

Of late, China’s ambitions have led it to carefully plot economic alliances with its Asian neighbors to jockey its ascent to the path of becoming a superpower. It was only natural that it should make its most strategic moves to penetrate mainland Southeast Asia through expanding its relations with Vietnam.

In 2005, then-Vietnamese President Tran Duc Luong and Chinese President Hu Jintao issued a joint communiqué recognizing their common goals for expanding bilateral relations and addressing territorial border issues. The agreement set the ball rolling for a five-year plan that aims to lead to US$15 billion two-way trade by 2010 under the banner, “two corridors, one economic belt.”

Ironically, the corridors China will take come from the past, retracing the silk road route that spanned from China to western Asia. One path will start in Kunming, Yunnan province and cut across Vietnam’s capital of Hanoi while the second route will come from Nanning, Guangxi province, also eventually converging into Hanoi.

The Guangxi Zhuang Autonomous Region borders Vietnam and is nestled between the provinces of Yunnan, Guizhou, Hunan and Guangdong. The province relies on Vietnam as its most vital trade partner with two-way trade accounting for US$1 billion worth of investments for the first seven months of this year.

In 2006, the United States maintaining its position as Vietnam’s top export market followed by the EU, Japan then China. The rankings may change significantly in the future with the completion of the two corridors and if the current U.S. slowdown fails to cease. The infrastructure will serve its purpose to complement and connect all the coal provinces located in the new economic belt lining the Gulf of Tonkin.

China’s vice commerce minister Gao Hucheng acknowledges that plans for the China-Vietnam trade partnership has been on the fast-track with trade value between the two reaching US$10.35 billion for the period of January to September this year. The figure reflects a 45 percent climb from last year’s numbers the Ministry of Commerce reports.

In addition, China has infused 407 direct investment projects in the country valued at an estimated US$1.07 billion. Chinese companies also bagged US$5.6 billion worth of construction projects with an expected turnover of US$1.92 billion.

The two have also participated in exchanging human resources skills that resulted in China training 1,357 officials and technical personnel along with lending expertise for electric power station, light rail, communication, and mining industry projects.

History
The two countries haven’t always seen so eye-to eye. China and Vietnam share a history that goes beyond a common 1,300-kilometer land border and shared use of the Gulf of Tonkin. Their relationship and shared enmity over the centuries have been no less tumultuous to say the least. During the first century B.C., China’s Han Dynasty ruled the Red River Delta in northern Vietnam 1,000 years. The Chinese rule brought in the development of infrastructure and agriculture for the Vietnamese along with the imposition of Chinese culture. Although Chinese language, customs and political institutions were mandated requirements, Nam Viet, as it was formerly called, never achieved full sinocization. By the tenth century, the Vietnamese were able to pry loose from Chinese rule.

In 1974, Sino-Vietnamese relations were aggravated when China troops grabbed the western part of the much-disputed Paracel islands occupied by a South Vietnamese garrison.

Trade relations between the two continued to sour before halting altogether in 1979 when China launched a 29 day military campaign on Vietnam’s border. China reasoned that the move was in response to Vietnam’s invasion of Cambodia and its alliance with the Soviet Union.

It was only in 1991 that relations between the two started to defrost, bringing about accelerated annual two-way trade that now amounts to an estimated US$10 billion dollars for 2007.

Feeding the dragon
What China wants, China usually gets. The nation has an almost insatiable hunger for natural resources that it desperately needs to feed its burgeoning growth. So it is no surprise that Vietnam’s top exports to China include coal, crude oil and natural rubber.

China is the leading manufacturer and user of coal in the world. Coal is the force that fuels China’s boom and answers seventy percent of its energy needs. Much more than just lighting homes, without coal-fired power plants the country would have never become the manufacturing titan that it is now.

Xu Dingming, one of the people tasked to manage China’s energy policy, told National Public Radio that coal answers the country’s urgent need for more power. Even with China’s sprinting growth, more than 10 million of its citizens still have no access to electricity.

In the next decade alone, China is set to construct 500 coal-fired power plants to accommodate increasing needs. Sources say that it will not take long before China topples the United States as the top emitter of greenhouse gasses and culprit for aggravating global warming issues.

So where does Vietnam figure into all of this? Besides being geographically ideal trading partner, Vietnam is also the largest exporter of anthracite coal in the world accounting to 13 percent of the global market with reserves pegged at 165 million tons.

Anthracite coal is considered the best of its kind because it burns at high temperatures, is almost smokeless and is utilized to make high-grade steel.

China alone purchases more than 60 percent of the country’s coal exports. For the first nine months of the year, Vietnam reported coal exports worth US$745 million.

Crude oil is another top Vietnamese export to China and the rest of the world, taking a 17 percent slice of its total export revenue pie. The country is the third biggest crude oil exporter in Southeast Asia and one of the countries located in the China Rim region to produce crude oil surplus. Since Vietnam is without its own major refining facilities, much of the oil is allotted for the export market while it continues to heavily import refined oil products to meet domestic needs. Data from industry publication Oil and Gas Journal estimates that its proven reserves consist of 600 million barrels alone, the breadth of which can expand exponentially with upcoming plans to expand and discover more oil fields.

As such is the case, China leads the race for oil demand in the world second only to the United States. Even then, analysts predict that China’s voracious appetite will soon overtake the U.S. to become the largest oil consumer in the world by 2025.

Figures for the first eight months of this year, shows China importing 110.4 million tons of crude oil along with exporting 2.18 million tons. And while China is increasing its supply of domestically-manufactured crude oil annually, it will still need to import around 44 percent of its crude supplies.

In the same vein, China is also eager to take advantage of Vietnam’s natural rubber supplies to sustain its lucrative hold on the industrial rubber market. China is Vietnam’s number one importer of natural rubber. For this year alone, natural rubber imports are expected to near the US$480 million mark.

The scope of the Chinese rubber market spans 18 categories and 50,000 kinds of rubber products. According to the China Rubber Industry Association, for the first six months of 2006, its 44 member companies alone churned out 86.53 million tires. That figure is a 14 percent increase from the same period in 2005.

What lies ahead
The China-Vietnam relationship is not without its flaws especially for the side of lesser-developed Vietnam. Although two-way trade has hiked up in the past years by as much as 40 percent annually, both countries stand on uneven ground with China seemingly getting more perks out of the relationship. For one, China enjoyed a US$4.6 billion trade surplus with Vietnam for 2006. While China remains to be one of Vietnam’s largest trade partners, trade with Vietnam only counts for less than 6 percent of China’s total export trade. The discrepancy can be traced mainly to the type of products Vietnam exports to China: coal, crude oil, rubber, foodstuff, seafood, footwear to name a few. Majority of which are either raw materials or low-value-added manufactured goods.

On the other end of the spectrum, China’s top exports to Vietnam include high-value-added manufactured goods like cars, motorbike parts, machinery, package equipment, pharmaceuticals, and petroleum.

An intensified trade relationship with China, will require Vietnam to step up its efforts to come on its own and step out of China’s shadow.

In an interview with Asia Times last year, Jonathan Pincus, senior country economist at the United Nations Development Program in Hanoi said, “The risk for Vietnam, if it opens its border to trade but does not upgrade technically to make value-added products, is it becomes an assembly factory and producer of raw materials for China.”

This is the first in a continuing series that will focus on China’s borders. The complete series to date can be found here.

1 thought on “Resources, relations and free trade: How China is opening up its borders to Vietnam

    Chris Devonshire-Ellis says:

    We’re seeing a lot of relocation from manufacturers in South China to Vietnam, in addition to new FDI business going in there that is ignoring China. The new “China Plus One” concept of Asian manufacturing seems to be making some headway, and this spreading of country risk, coupled with a looser regulatory investment environment and tax incentives to beginning to encourage multinationals to set up in Vietnam. The proposed “Free Trade Zone” between Hanoi and Kunming is also attractive for the flow of goods between the countries. Dezan Shira & Associates is following this through with the establishment of offices in Hanoi and Ho Chi Minh City in Q2 2008 in order to service existing China clients as well as advise new to Asia manufacturers.

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