The economies of the People's Republic of China (PRC) and Vietnam are
both lurching into crisis, creating new opportunities for friction between the
two hostile neighbors and bringing the prospect of intensified geopolitical
migraine for the United States.
Certainly, the geostrategic
foundations for conflict have been laid.
In a few years, Wikipedia might
have an article like this:
The PRC ... was ... growing
increasingly defiant against the United States. On November 3, 2018, the United
States and Vietnam signed a 25-year mutual defense treaty, which made Vietnam
the "linchpin" in the United States' "drive to contain
China."
On January 1, 2019, Xi Jinping
[having taken over from Hu Jintao as party general secretary in 2012] declared
that China planned to conduct a limited attack on Vietnam. The reason cited for
the attack was the mistreatment of Vietnam's ethnic Chinese minority and the
Vietnamese occupation of the Spratly Islands (claimed by the PRC). ...
In response to China's attack,
the United States sent several naval vessels and initiated a US arms airlift to
Vietnam. However the United States felt that there was simply no way that they
could directly support Vietnam against the PRC; the distances were too great to
be an effective ally ... Vietnam was important to US policy but not enough for
the Americans to go to war. When Washington did not intervene, Beijing publicly
proclaimed that the United States had broken its numerous promises to assist
Vietnam.
The punch line is, this Wikipedia
article on the Sino-Vietnamese War already exists, with minor edits. [1] For the
United States, just substitute "the Soviet Union" and for
"2019" pencil in "1979".
It isn't clear who
"won" the 1979 war - a subject that is still debated today by
partisans on Internet message board with the civility and detachment typical of
most discussions concerning Sino-Vietnamese issues. [2]
The bloody campaign revealed
numerous shortcomings of the People's Liberation Army in its late-Mao/post
Cultural Revolution incarnation, and the hardened, motivated, and well-equipped
Vietnamese units gave a good account of themselves.
However, if it was Deng
Xiaoping's intention to demonstrate to Vietnam that it would have to confront
China alone and without significant assistance from the Soviet Union, he
succeeded.
It is safe to say that the United
States would very much prefer not to be forced into the same predicament as the
Soviet Union, ie called on to make good militarily on its contain-China
commitments in Asia in the case of Chinese aggression against Vietnam.
The ideal scenario for conflict-averse
leaders in Beijing, Washington, and Hanoi would be for surging economic growth
to create division of labor, shared prosperity, and a win-win outcome in the
region.
However, thanks to the mis-steps
of the North Atlantic financial combine in 2008-2009, political roadblocks to
stimulus in the United States, and the German-driven austerity fad sweeping
Europe, surging economic growth simply isn't on the agenda.
Dee Woo, a columnist and
provocateur from the pro-panda side of the street, contended in a column that
war between China and Vietnam was "inevitable" since the PRC would
find the temptation to give Vietnam a military comeuppance irresistible, and
the United States and the international oil companies would see no alternative
to abandoning Hanoi for the sake of joint development of South China Sea oil
resources. [3]
Indeed, as the bad news stacks
up, the stresses on the export-reliant economies of China and Vietnam mean that
competition, beggar-thy-neighbor policies, jingoism and, when necessary,
confrontation are more likely to appear on each country's agenda.
Nevertheless, the signs are that
the PRC and Vietnam are responding independently to their shared economic
difficulties in complementary ways, giving hope that the mutual temptation to make
political and nationalistic mischief will be trumped by a shared desire by each
party to keep its own economy on track.
Because of its massive economic
footprint, China's travails attract the most international attention. But
Vietnam is experiencing severe growing pains of its own.
Prime Minister Nguyen Tan Dung's
ambitious plan of nurturing chaebol-style privatized industrial and service
conglomerates manifested itself in a program of indiscriminate bank lending to
politically-connected cronies and creaky state-run behemoths. The program's
first fruits included growth and inflation; as inflation was tamed, the world
economy hit the wall, exports have slowed and corporate profits have sagged,
and the problems of non-performing loans and dodgy bank liquidity have emerged.
Aggregate non-performing loans
are rumored to reach 10% of loans outstanding. In a normal banking environment,
that translates into insolvency. For Vietnam's small buccaneer banks, bad loans
may account for a 50% share.
Bad banking news was compounded
by the arrest of high-profile Vietnamese banking tycoon Nguyen Duc Kien on
August 21 for murkily defined economic crimes - perhaps a pyramid scheme to
obtain hundreds of millions of dollars of bank funding on dubious collateral -
followed by a run on his Asia Commercial Bank. The Vietnamese government pumped
$900 million in liquidity into the banking system to make sure no anxious
depositor would go home empty-handed. Vietnam's stock index, heavily weighted
toward financial companies, sagged 9%.
These recent developments were
contemplated with remarkable equanimity by the international analytic and
pundit community. Kien's detention was viewed as a consequence of a power
struggle between his economic godfather, Prime Minister Dung, and the more
old-school communists clustered around the President, Truong Tan Sang, rather
than a harbinger of impending economic collapse.
Apparently, Leninist rigor counts
for more than free market discipline with emerging-market financiers.
Kien's arrest - following a
management purge at Vietnam's particularly inept state-owned shipbuilder,
Vinashin, and the government mediated merger of a faltering bank with a
stronger rival - was seen as the culmination of a process of political
correction meant to ensure social and economic order.
Perhaps international optimism
contains a dash of wishful thinking attributable to capitalist blue chip
Standard Charter's 15% share in Kien's flagship bank, ACB, and the eagerness of
foreign financiers to participate in the restructuring of Vietnam's banking
industry as investors and/or M&A overlords. Standard & Poor's decided
that the government had a handle on the banking situation and contagion - a
pervasive loss of confidence and evaporation of liquidity that characterized
the Wall Street crisis of 2008 - was unlikely, at least for now. [4]
With price/earnings ratios down
to 9.4 as a result of the collapse of the price of equities, Vietnamese stocks
turned into a modest buying opportunity.
Perhaps attitudes within the
ruling circles of the Vietnamese Communist Party are less blase. Dropping the
hammer on Kien involved sizable expenditure of cash to prop up the banking
system just for the day; a certain percentage of that cash turned into private
gold holdings (Vietnam reportedly has the highest per capita holdings of gold
in the world) that probably won't come back into the banking system as deposits
any time soon.
If, as news reports imply, Kien
was running a pyramid scheme involving trillions of dong in cash obtained from
Vietnamese banks through loans or bond sales based on dodgy assets, it would
also appear to be untenable for banks not to write down their losses and they
will have to be recapitalized largely at government expense. [5]
It isn't as if vibrant economic
performance and elite unity made this a good time to clear out the financial
and political deadwood and undertake an expensive overhaul of the banking
system. As Agence France-Presse reported from Hanoi, things aren't going
particularly well:
With economic growth now just
4.4% year-on-year in the first half of 2012, foreign direct investment down
nearly 30% in the same period and toxic debt in the fragile banking system at
"alarming levels" according to the central bank, there has been
increasingly vocal criticism of Dung.
"Never has Vietnamese
society faced so many unheavals which weaken the Party's leadership and threaten
the survival of the whole political regime," a retired National Assembly
deputy told AFP. "Some party leaders have lost patience, and feel it is
time to act to eliminate these potential threats and regain public
confidence," he added, speaking on condition of anonymity.
In a scathing op-ed on Thursday,
President Truong Tan Sang - one of Dung's main political rivals - said that
"Vietnam is now under not insignificant pressure because of broken
state-owned enterprises."
This is a degree of economic,
social, and political difficulty that does not automatically translate into a
"let bygones be bygones" atmosphere between Prime Minister Dung and
his critics in the Politburo, especially if public dissatisfaction turns
militant.
As a prominent Vietnamese
economist told the New York Times:
“The problem in Vietnam is a very
toxic cocktail from the European debt crisis, the stagnation in the US economy
plus a very critical situation in the domestic economy. It's a very dangerous mixture.”
[6]
Economic crisis, corruption,
public discontent, and a leadership split were the ingredients for near
catastrophe for the Chinese Communist Party in 1989. If all those conditions
apply to Vietnam in 2012, it will be a difficult time for the Vietnamese
Communist Party and foreign investors as well.
At the same time, it appears the
Vietnamese government is ill-equipped to deliver another round of
crowd-pleasing stimulus without reigniting inflation, reinflating its real
estate bubble, or digging a deeper hole for its banks with more non-performing
loans.
The regime may well decide the
best way to keep people in the factories and off the streets is to crank up the
export engine through another devaluation of the dong, even in the face of
slackening global demand.
Up north, China is facing a
similar situation, without as much political heartburn. Having dealt summarily
with loose cannon Bo Xilai, the disgraced Chongqing municipality party party
chief, the party appears committed to maintaining party unity in the run-up to
the leadership transition. The PRC is also trying to wean itself off its
reliance on exports.
The impulse to correct imbalances
in the Chinese economy is represented by the reformists advising Premier Wen
Jiabao. The reformists' optimistic scenario involves China renouncing the easy
gratification of infrastructure spending, export processing, and
indiscriminately shoveling money into the maw of state-owned industries for the
sterner pleasures of modernizing the Chinese economy through increased private
investment and public consumption.
When international economic
growth slowed (and the inflationary overhang of the 2008-2009 stimulus
militating against another massive injection of cash into the Chinese economy),
Wen's team seek to turn lemons into lemonade by using the current challenges as
an impetus to reform.
However, gliding up the value
chain and avoiding the middle income trap is neither a quick nor easy process,
while the degradation in global demand has been rapid and unforgiving.
According to China's July trade figures, exports to the United States flatlined
year-on-year, while exports to the EU collapsed, 16.2% lower than last July.
The bad news was compounded by
confirmation of a prolonged underperformance in consumption and disappointing
profits or losses reported by consumer goods producers and retailers. If the
Chinese government had any hopes of decoupling domestic consumption from the
vagaries of the export market, they have been put paid by the simultaneous
pricking of the real estate bubble, flabbiness in the stock market, and
attendant losses among the asset-trading classes.
Per Bloomberg:
Passenger-vehicle sales trailed
analysts' estimates in July. Sportswear seller Li Ning Co shut 1,200 stores in
the first half and department-store chain Parkson Retail Group Ltd's same-store
sales rose at less than a quarter the pace of a year earlier. Gome Electrical
Appliances Holding Ltd. (493) said it would report a first-half loss on lower
sales.
"The pressure on retail
sales is growing bigger and bigger," said Shen Jianguang, Hong Kong-based
chief Asia economist at Mizuho Securities Asia Ltd. "When exports are
fragile and investment is weak, if companies started to reduce their production
or workforce, how can it be possible for consumer spending to stay strong?
"Consumer spending is
decided critically by income, and as we can see, China's industrial profits are
falling at a faster speed in July, which means more headwinds for employee
compensation, wages and bonuses," said Zhang Zhiwei, chief China economist
at Nomura Holdings Inc. in Hong Kong. "For non-wage income such as
investment income from property and stock markets, you don't have to be an
expert to tell that most people are actually losing money, so overall consumer
disposable income is actually very weak." [7]
The specter of China failing to
reach its annual export target of 10% growth (and thereby missing its GDP
growth target of 7.5%) was apparently enough to send Wen Jiabao, essentially
the PRC's apostle of doing something other than exporting, to the nation's
export powerhouse, Guangdong, with words of encouragement.
However, depreciating the yuan,
the only export-promotion quick-fix method with a hope of efficacy, is
apparently the trade policy that dares not speak its name, perhaps because a
combination of weak international demand and European and US protectionism stand
ready to slam the door on this particular economic escape hatch.
Therefore, when describing what
exporters should do when faced with slack international demand, increasing
labor costs, and a strong currency, all Wen could do was nibble around the edges
with empty exhortations to innovate and promises of regulatory relief. To put
it cruelly, he sounded just like an American or European politician beating the
hollow trade promotion drum:
Wen urged authorities to continue
to implement and improve export policies, including fast-tracking tax rebates,
expanding export credit insurance scale, bettering services to facilitate
trade, cutting inspection directory and canceling unreasonable fees to ease
burdens on enterprises.
He said China should guide financial
institutions to increase supply of currency hedge products to prepare for
market changes. Meanwhile, Wen encouraged foreign trade enterprises to
cultivate more self-developed brands, and build up international sales network.
He said China should properly cope with trade frictions to minimize their
negative impacts on the economy while improving investment climate for foreign
capital.
Wen noted that China's recent
fine-tuning policies, especially those created since May, had produced
noticeable effects in boosting market confidence and lift the economy. These
pro-growth measures include more aggressive tax reduction, issuing subsidies to
support enterprises' technology upgrades, and opening state-run sectors to
private investors. [8]
The markets seem to be relying on
expectations that the Chinese government will forget about reformism and
incremental measures, turn its back on devaluation, and eventually roll out the
big gun: stimulus to keep factories humming and move goods out of warehouses.
The euphemism for this
expectation appears to be "confidence", a state of mind Wen
repeatedly invoked on his trip to Guangdong. As Simon Rabinovitch put it in the
Financial Times' Beyondbrics blog in a whistling-past-the-graveyard post that
seems to embody the same kind of anxious hopefulness displayed by Westerners
trying to will away the problems of the Vietnamese economy:
Wen Jiabao, China's premier ...
has issued a rallying cry for "confidence". Sure, talk can be cheap.
But have a look at the premier's track record when he calls for confidence in
the government's economic policies. He doesn't dish the word out lightly.
The first time was in September
2008, shortly after the collapse of Lehman Brothers. "Confidence is more
important than gold and money," he said ... Weeks later, the government
launched a mammoth stimulus package that powered the economy through the global
financial crisis.
Over the following three years,
Wen has mentioned confidence several times - it is a hard word for a national
leader to avoid. But yesterday was the first time since the news conference in
March 2009 that he made confidence such a dominant theme in a speech. ...
If history is any guide, Wen
might just know what he's talking about. [9]
It appears that foreign and
domestic stimulus junkies may have to wait for their "confidence" fix
until early next year, as the Chinese government hopes against hope that
international demand picks up, and tries to forestall inflation and a return to
the blind craze of investing in real estate and other fixed assets in favor of
a new kind of restructuring.
However, Wen's agenda of targeted
and delayed stimulus is a hostage to circumstances: the dismal international
economic outlook, the economic and political costs of a painful restructuring of
China's labor-intensive export industries, and the strength of politically and
ideologically motivated opposition to his agenda in the Politburo.
If Wen can't pull it off, the
prognosis is for a more profligate and forgiving version of stimulus and some
oblique form of currency devaluation, perhaps in the form of quantitative
easing.
Even so, the fundamentals of the
Chinese economy, the potential for a complementary trade and economic
relationship with Vietnam, and the fraught circumstances of US-China relations
in an election year still make significant, overt currency devaluation, a trade
war with ASEAN competitors, and the prospects of a real war with Vietnam
thankfully more distant.
Notes:
1. Sino-Vietnamese War, Wikipedia.
2. A Self Humiliation For China (China-Vietnam War 1979),
YouTube.
3. Why A War Between China And Vietnam Is Inevitable,
Business Insider, Jul 22, 2011.
4. S&P Says Vietnam Banks' Risks Highlighted;
Contagion Unlikely, Reuters, Aug 28, 2012.
5. What tactics Kien used to do illegal business?,
Vietnam Net, Aug 24, 2012.
6. Vietnam faces economic meltdown - Columnist - New
Straits Times Vietnam faces economic meltdown, NST.com, Aug 25, 2012.
7. China Retailers Lose Steam, Deepening Wen's
Challenges, Bloomberg, Aug 29, 2012.
8. Premier urges targeted, effective efforts to stabilize
export growth, Xinhua, Aug 25, 2012.
9. Wen Jiabao, the confidence man, Financial Times, Aug
26, 2012.
Peter Lee
Peter Lee writes on East and South Asian affairs and their intersection
with US foreign policy
Business & Investment Opportunities
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