Economic relations

Although the economic development during the last two years of the 1990s is slow, its performance, in general, is dramatically changed with rhetorical encouragement by Vietnamese leaders. To achieve the goal of “a prosperous population, a powerful country, and an equitable and civilized society”, President Tran Duc Luong and Vietnamese Communist Party (VCP) continuously encourages people to hasten production and fulfil socioeconomic for the coming years when the country is on the way toward the success of industrialization and modernization.

26

This is a creative manipulation of Marxism-Leninism and Ho Chi Minh's views on socialism which reflect the expectation of modernization of all Vietnamese citizens in Vietnamese economic performance. During the first seven years of the 1990s, Vietnam’s average annual gross domestic product (GDP) growth was 8.4 percent. By conducting seriously the poverty reduction program, the alleviation of poverty in Vietnam gained very astonishing results. Particularly, the percentage of people below the poverty line declined significantly from 58 to 37 percent between 1992-1993 and 1997-1998, and the number of people suffered from food shortages and poverty decreased from 25 to 15 percent (Poverty Working Group, 1999). At the same time, the country also increased its in-flow of foreign direct investment (FDI) to $4.4 billion per year on average (International Monetary Fund, 1999b). The export increased averagely 10 percent per year while the inflation was under control. Needless to say, Vietnam had achieved significant progress in economic development at that time.

Nevertheless, it seems that Vietnam has nurtured a very big dream. In comparison to its neighbouring Association of Southeast Asian Nations (ASEAN) countries, the per capita income of Vietnam at that time was just $210 (State, 1996).

Therefore, Vietnam’s high growth rate of the 1990s had not shown that its economy was on the good development momentum. Another evidence is that Vietnam’s growth was thanks dramatically to inflated land values, very cheap labour and especially foreign aid which made Vietnam quickly became one of the largest recipients of foreign assistance in the world.

Even though it had greatly modified the economic policy-making, it remained a generally stagnant economy. In 1998, Vietnamese growth rate was less than a third of the average of the period of 1991-1997 (International Monetary Fund, 2000). The Vietnamese leaders pointed out that the Asian economic crisis in the period of

1997-27

1998 is the important drawback of its economic downturn. In order to recover from this situation, they continuously believed that with a turnaround in Asian financial crisis with large external developmental assistance would occur (International Moneraty Fund, 1999a).

After the two countries normalised their relations, trading activities increased rapidly but developed in negative directions. It is true to say that Vietnam-China economic relations maintain the development trend with many agreements and cooperating documents, laying the legal basis for long-term cooperation between the two countries. Specifically, the two countries have many important projects to strengthen the connection of development strategy, promote the link between the "two corridors, one belt" with the “one belt, one road” (Nam Duong, 2016). Besides, there are many cooperation projects in the fields like construction materials, supporting industries, machinery and equipment, electricity, renewable energy, etc.,. In fact, while Vietnam's export turnover to China in the 1990s was nearly $4.9 billion, its import turnover from China was $4.3 billion, and thus the export surplus was $600 million. Since the beginning of twenty-first century, Vietnam-China trade relations developed in the opposite direction. In 2001, Vietnam’s export reached $1.4 billion and its import was over $1.6 billion, trade deficit was nearly $200 million. From 2006 to 2016, Vietnam and China bilateral trade increased from $10.6 billion to $71.9 billion. Accordingly, on average, while the annual import turnover increased 22.4%, export turnover only increased 20.2%, hence Vietnam’s trade deficit increased quickly. Trade balance of Vietnam was $32.8 billion in 2015, almost doubled the export of Vietnamese goods to China. In 2016, its trade balance was $27.9 billion, 1.27 times higher than Vietnam’s export to this market. It could be said that China’s high proportion in the total trade of Vietnam (in comparison with other markets like

28

Japan, the U.S., South Korea, ASEAN countries) is what should be concerned. This is because the changes from China may affect not only directly and immediately Vietnam’s trade, but the activities of Vietnamese enterprises in various level with different fields.

Over the past 10 years, although the export of Vietnam to China has grown steadily, this is still much lower than the increase of import. Vietnam's export to this market focuses mostly intermediate goods, consumer goods, petrol. With this export structure, Vietnam will be difficult to gain much profit. Meanwhile, most of the materials used for the export production of Vietnam are imported from China. Until now, China is still Vietnam's largest trading partner and Vietnam also becomes China's largest trading partner in Southeast Asia (Vietnam Customs, 2016). Despite this, Vietnam still remains trade deficit to this market due to the significant difference in the growth rate of export and import.

As such, it can be said that Vietnam’s domestic production and business activities are heavily dependent on China. If Vietnam does not diversify both export and import markets, it will be increasingly reliant on China in the field of trade. As a consequence, if China adjusts its trade policy and applies protective measures for its domestic production, supporting its export, or forbidding or restricting certain imports and exports; Vietnam’s economy will face many difficulties, especially for manufacturing enterprises.

The bilateral trade relations over the past ten years have been tilted towards China, as China mainly exports refined commodities and imports raw materials.

Meanwhile, Vietnam has not benefited much and has not utilized its advantages in this commercial relationship. Additionally, Because the design and style of Chinese goods are attractive, the price is competitive and the cost of transportation to Vietnam

29

is lower than other markets; China's clothing, toys, fruits and food have spilled into the Vietnamese market, contributing to satisfy the consumption demands of some classes of population. However, the excessive import of consumer goods from China, which is mainly through small quota and partly cross-border smuggling, has inhibited the development of Vietnam's industry. More importantly, there are many poor and toxic quality products originating in China are also sold in Vietnam, affecting the health of Vietnamese consumers.

Some resource-rich countries or those who their industrialization is lower than China like Vietnam has been affected by the export of resources, raw materials and processed goods. Meanwhile, the Chinese export of finished products has the ability to compete very well with resource-exporting countries. As a result, the industrial production of resource-exporting nations is narrowed; even these states cannot develop due to being tied to the export of resources and goods with low technical content. In the long term, the economy will lose the ability to improve productivity because the industrial production is lack of innovation and creativity.

In short, Vietnam – China trading relation has gained many achievements in the recent years. However, Vietnam needs to act on its own to build an independent economy through specific directions aiming to reduce risks caused by China. Thence, the commercial performance between Vietnam and China can be improved dramatically.

In terms of investment, China's foreign direct investment in Vietnam recently has witnessed marked improvement over the first nine years after the normalization of relations between the two countries. Since 2000, China's investment has grown rapidly in terms of quantity, scale and location.

30

From 1991 to 1999, China had 76 projects with a total investment capital of $120 million (Institute of Chinese Studies, 2010). However, China’s projects in Vietnam increased to 657 in 10 years later with a total registered capital of $2.6 billion (Institute of Chinese Studies, 2010). As such, within 10 years, the number of Chinese projects in Vietnam had increased more than eight times, the registered capital increased 22 times in compare with the first nine years after normalization. China's investment has increased steadily over the years. However, due to the impact of the world financial crisis and the downing trend of direct investment in Vietnam, China's investment in Vietnam in 2009 also decreased significantly compared to previous years both in terms of quantity project and new registered capital. Especially, the number of newly licensed projects and investment capital of China in Vietnam in 2009 was a half and about 1/3, respectively in 2008. By the end of February 2015, China had 1109 projects in Vietnam with a total registered capital of $7.99 billion, ranking 9^th out of 101 investors in Vietnam (Ministry of Foreign Affairs, 2015). In 2016, China's investment in Vietnam reached $ 1.26 billion, accounting for 8.3% of total FDI into Vietnam (Chan Luan, 2017, April 5). China's investment in Vietnam in 2016 had witnessed a shift from hospitality, restaurant and consumer goods sectors to processing and manufacturing. In addition, China's investment is scattered in other areas such as real estate, accommodation and catering, mining, information and communication, electricity, water, air conditioning. It could be said that China's investment in Vietnam has been only concentrated in the normal business, but changes in the investment sector as a result of the changes in investment scale and form.

In the past, most of the direct investment projects of Chinese enterprises into Vietnam were joint ventures with Vietnamese enterprises, but in recent years there

31

have been significant changes (Institute of Chinese Studies, 2010). For example, in 2009, there were 441 out of 657 investment projects in the form of 100% foreign capital, accounting for 67%, topping in the four investment forms of China in Vietnam, followed by the joint venture with 169 out of 657 projects, accounting for 25%, finally business cooperation contracts and joint stock companies. This change shows that Chinese businesses are confident, knowledgeable, and affordable in business independence as well as trust in the Vietnamese market.

At present, direct investment of China is present in 52 provinces and cities of Vietnam but mainly in densely populated cities with strong labour attraction, good infrastructure, where are convenient for import and export as well as travel between China and Vietnam (Institute of Chinese Studies, 2017). China's direct investment has also been directed at some of Vietnam's border provinces. Some of them have poor infrastructure, low level of development and difficulty to attract foreign investment such as Lao Cai, Lang Son, Cao Bang, Lai Chau. This reflects the result of the strengthening of cooperation between the localities of the two countries, especially the promotion of cooperation with Vietnam of some Chinese provinces such as Guangdong, Yunnan, Guangxi; a new trend in the development of Vietnam-China relations.

In order to strengthen the major investment projects in infrastructure and cooperation in the field of banking and finance, especially cooperation in preventing the impact of the international monetary and financial crisis, as well as in protecting currency security in each country, the two sides are promoting the establishment of working groups on cooperation in infrastructure and the working group on monetary cooperation.

32

China's outward investment trend is on the rise, thus Vietnam has a belief that China's foreign direct investment in Vietnam will continue to grow and contribute positively to each country’s economy as well as the Vietnam-China relationship.