VIETNAM STRATEGY INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

May 19, 2014 www.ssi.com.vn 1

Contact
Phuong Hoang
phuonghv@ssi.com.vn
Hung Pham
hungpl@ssi.com.vn

19 May 2014

Vietnam-China tension: a snapshot on the impact
VNIndex ended its uptrend at the beginning of April due to lack of supportive macro and
policy news. While investors were discouraged on the lack of effort made in terms Foreign
Ownership Limit (FOL) extension, banking and SOEs reforms gained moderate momentum.
Given the fact that VNIndex nearly reached its 2014 target in the first quarter alone, valuation
seemed to have been priced in investors expectation on a macro turnaround and the on-going
economic reforms.
In early May, the market tumbled on news of Chinas oil rig in Vietnamese waters. The
Government is doing their best to put out the fire that has been sparked among nationalistic
Vietnamese protestors. In a press conference on 15 May, the Ministry of Foreign Affairs
spokesman cited no ground on the Reuters report on the 21-death cases resulting from the
recent anti-China riots. Recent protests have been targeted at Chinese factories in Vietnams
Binh Duong and Ha Tinh provinces. Ideally, the Government wants to tame this situation as
soon as possible as they are concern that recent actions might dampen FDI attraction.
Specifically, the Government issued a directive to all local authorities requesting that they do
their best to maintain order and protect foreign investors interests and assets. We believe that
Vietnam will restore order very soon. In the press conference we learned that Vietnamese Vice
Minister of Foreign Affairs visited China from May 13-15th and although no agreement was
struck, we take comfort in the fact that dialogue between the two neighbors has been initiated.
Although local investors' sentiment have been relatively volatile in the past weeks, FX
and gold markets remained relatively stable
- Foreign investors net sold roughly USD 90 mil in government bonds, but their net buy
position in the equity market was roughly USD 70 mil from 8 May
- During this time, VND forfeited roughly 0.2%, a modest figure. Vietnam current account
surplus remain high (year to date trade surplus was USD 2 bn), couple with rising forex
reserve (USD 35 bn, about 20.5% of GDP), therefore pressure on VND is minimal.
- Added volatility returned to the gold bar market, where the gap between local and global
gold bar price was nearly 10% (not at an all time high), however, we believe that this
volatility will be short-lived given the fact that the State Bank of Vietnam is ready to resume
its gold bar auction (which stopped from last November due to weak demand).
- Vietnam 5 year CDS showed no spike during this period, and edged lower to 210
VIETNAM STRATEGY INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

May 19, 2014 www.ssi.com.vn 2

Dispute with a neighbor who is the worlds manufacturing base is never an easy task. Recent events are not anything
new to the two neighboring countries. Both countries must settle their differences for the sake of economic and trade
relationships.
Vietnam - China trade relation: The largest supplier of production input
China is one of Vietnams biggest trade partner, (1
st
in import 27.97% of Vietnam import, 3
rd
in export- 10% of
Vietnam export) with a big trade deficit (USD 23 bn in 2013). If taking into account border trade, the number is even
higher. Should tension escalates, import will be more adversely affected than export as key imports are input for
production (machinery , 35.12% of Vietnam machinery import, and fabric + leather, 41.92%) whil e most export have
low added value (agriculture, natural resource). Switching to other sources of imports are not easy even in the
medium term, and producing those input domestically will require involvement from China or China-related countries
(such as Taiwan, and Hong Kong).
China is also one of the largest contractors in energy, infrastructure and mining projects in Vietnam. Reports from the
Ministry of Industry and Trade show that 15/20 thermal power plant projects have Chinese companies as EPC
contractors, and in terms of transportation projects, almost all the projects are contracted through Chinese firms.
Domestic presence in those projects with Chinese EPC contractors are almost zero (i.e almost everything is
imported). So if tension escalates, both countries interests will be at risk.
2013 import from China (USD mil) 36,937 2013 export to China (USD mil) 13,233
Machinery 6,561 Agriculture products* 4,106
Phone and spare part 5,698 Electronics 2,090
Fabric & raw material for textile, garment and footwear 5,081 Wood & wooden products 1,051
Electronics 4,501 Natural resource** 1,398
Steel & steel products 3,231 Fiber & yarn 900


*Rubber, cassava, rice, fisheries, vegetables, cashew, coffee, tea

**Crude oil, coal, ore
Source: Vietnam Customs
FDI is just too big to fail in Vietnam: FDI plays a key role in Vietnam economy given weakened domestic
investment. GDP growth was spearheaded by FDI in 2013 and 1Q14, where FDI sector enjoyed a much higher
growth rate in construction, foreign trade and employment. Given the fact that Vietnam currently runs a budget deficit
and the whole economy and in particular, the banking system is still deleveraging, support from foreign investments is
what is needed to salvage growth.
On the other hand, FDI is synonymous with labor intensive sectors (such as garment and textile, footwear, electronics
assembly) which continues to be a refuge for Vietnam rising labor force. Should these labor intensive sectors fall
prey to recent events, unemployment rate might surge, and social unrest will supersede. China ranks 9
th
in top the
FDI investor list (3% of total), but if Taiwan and Hon Kong was to be included along side with China, this group would
rank 1st. However, recent riots which have damaged several Chinese factories might weaken the overall FDI
sentiment, not just Chinese-speaking group.
VIETNAM STRATEGY INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

May 19, 2014 www.ssi.com.vn 3

Follow-up response from Vietnam government was quite positive, which include i) Strong message from top leaders
which show the Governments determination to stop factory riots ii) tightened supervision on recent demonstrations to
avoid riots and social unrest as the Government has been caught off guard in recent events, and not effectively
communicating to media regarding the issue. iii) Compensation to damaged factory is confirmed, by reducing
corporate income tax if insurance coverage is not enough. It is reported that a large number of FDI enterprises have
restarted production. In the Vietnam Singapore Industrial Park - VSIP, the hot spot of the factory riot, more than two
thirds of factories have re-openned last week and the number might be increasing this week.
Conclusion: Although the extreme case where the two countries will deploy military forces is very unlikely,
the market is closely monitoring the Governments actions and the impact of the Vietnam-China tension. At
this point we believe that it would take at least 1-2 months to normalize the current disputes, and investors
would have to get acquaint with high volatility. Any new pro-growth policy and FOL extension will be highly
welcomed at this point while macro indicators will need 1-2 quarters to show clear improvement.
We reiterate our view that the decline has even spawn opportunities to for long term investors to buy Vietnam equities
at very reasonable prices. Market PER as of 15 May was 11.36x, a high discount to other ASEAN markets
Vietnam CDS








VIETNAM STRATEGY INSTITUTIONAL RESEARCH & INVESTMENT ADVISORY

May 19, 2014 www.ssi.com.vn 4

Export and import growth by FDI and domestic enterprises (YTD, source: GSO)


Recent performance of FDI sector
2013 YoY Growth FDI sector State sector Private sector
Construction 34.3% -1.4% 6.2%
Employment in manufacturing sector 6.6% -0.3% 3.2%
Export 26.8% 3.5%
Import 24.2% 5.6%
Source: GSO
Top FDI investors
No Investors
Number of
projects
Total registered
investment (USD mil)
Charter capital (USD mil)
1 Japan 2266 35,514.15 11,443.63
2 South Korea 3736 30,767.93 9,781.55
3 Singapore 1266 30,292.94 7,812.18
4 Taiwan 2306 27,431.37 11,571.45
5 British Virgin Islands 530 17,667.72 5,744.58
6 Hong Kong 799 12,832.62 4,028.00
7 The United States 690 10,699.64 2,551.28
8 Malaysia 460 10,479.50 3,664.41
9 China 1019 7,821.40 3,068.97
10 Thailand 345 6,418.12 2,835.60
11 Other 2906 47,708.29 18,244.27

Total 16323 237,633.69 80,745.92
Source: MPI

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