Vietnam, China lurch towards crisis
Asia Times – 01/09/2012 – por Peter Lee
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.  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. 
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. 
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. 
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 certainpercentage 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. 
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:
[W]ith 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. 
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.
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.” 
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. 
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. 
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.