Potholes lie ahead for China’s Belt and Road Initiative in Vietnam

Dr. Le Hong Hiep, a Fellow at the ISEAS-Yusof Ishak Institute in Singapore

Vietnam, which is included in China’s Belt and Road Initiative’s (BRI) geographical scope and has a great need for infrastructure investments, stands to benefit from the initiative.

According to the 2017 Global Infrastructure Outlook report published by the Global Infrastructure Hub, Vietnam’s need for infrastructure investment between 2016 and 2040 amounts to $605 billion. Notably, the gap between investment need and current trends of investment is a staggering $102 billion, meaning that Vietnam will have to actively seek different sources of funding to cover the gap. Vietnam has therefore endorsed the BRI as it may become an important source of funding that Hanoi may want to tap in the future.

During President Xi Jinping’s visit to Hanoi in November 2017, the two countries signed a Memorandum of Understanding (MOU) on promoting connections between the “Two Corridors, One Belt” framework (TCOB) and the BRI. The signing of the MOU, however, does not guarantee that the BRI will see breakthroughs in Vietnam in the foreseeable future.

In fact, apart from some statements welcoming the BRI and proposing principles for its implementation, Vietnam’s reactions to the initiative have remained ambivalent. So far, no new infrastructure projects in Vietnam have been officially labelled as BRI-funded, except for an additional loan of $250 million for the Cat Linh – Ha Dong metro line in Hanoi that has been quietly and unofficially classified as such by both sides. This attitude in Hanoi can be explained by three major factors.

Firstly, Vietnam is generally cautious about the initiative’s implications for the country. It took the two countries two years to negotiate the MOU, implying that the two sides had some disagreements on its content. The title of the MOU, which highlights the promotion of connections between the two initiatives, is also noteworthy, as it implies that the TCOB is treated as a separate plan and that Vietnam is unwilling to brand it as part of the BRI, at least not publicly.

Such reservations are understandable given the lingering distrust between the two countries due to disputes in the South China Sea (known as the East Sea in Vietnam). At an official level, Vietnam’s emphasis of such principles as consensus, equality, mutual respect, and compliance with the UN Charter and international law in the implementation of the BRI implies that Vietnam is being cautious about the BRI’s implications.

Some Vietnamese scholars have also expressed concerns that the BRI has “implications that transcend economics.” At an international conference held in Hanoi in October 2017 on the opportunities and challenges presented by the BRI, they warned that Vietnam’s participation in the initiative may lead to its “excessive dependence” on China, and even harm its territorial and maritime claims in the South China Sea. They also highlighted other concerns, such as insufficient protection of labour rights, Chinese firms’ poor environmental record, lack of transparency and China’s challenging of internationally recognised dispute settlement mechanisms. As such, they recommended that Vietnam and other countries look beyond mere economic gains when considering participation in the BRI.

Secondly, as some Vietnamese scholars have pointed out, getting Chinese loans is neither “cheap” nor “easy.” The interest rate on Chinese loans will not be as low as many expected. For example, the Thai government dismissed the 2.5 per cent interest rate offered by China for its high-speed rail line connecting Bangkok and Nakhon Ratchasima as being too high, and decided not to seek loans from China. China also normally imposes conditions on its preferential loans, including the use of Chinese technologies, equipment and contractors. In this regard, Vietnam’s abundant experience with the poor record of Chinese contractors and technologies on various projects will dampen its willingness to take on Chinese loans through the BRI if they come with such conditions.

Thirdly, there are alternatives to the BRI that Vietnam would like to explore to finance its infrastructure projects, including loans from international financial institutions and ODA partners, especially Japan. After Vietnam achieved its middle-income country status in 2009, loans from these sources have become more expensive, but there are upsides that still make them more attractive to Vietnam than BRI loans. For example, loans from international financial institutions generally come with fewer conditions, and there’s no requirement on using contractors or equipment from any specific country. Meanwhile, although ODA loans from Japan do require Vietnam to use Japanese services and equipment in most cases, Japanese contractors and technologies are still perceived by the Vietnamese public as being more trustworthy than their Chinese alternatives.

Hanoi’s first elevated railway line running from Cat Linh to Ha Dong with funding from the Chinese government. Photo by VnExpress

Another option for infrastructure development that Vietnam would like to promote is the Public-Private Partnership (PPP) model. From 2011 to 2017, Vietnam mobilized VND200 trillion (about $9 billion) in PPP investments from private businesses. Despite certain setbacks, PPP projects will continue to be a major tool for Vietnam to develop its infrastructure systems, including large-scale ones, as they can help relieve financial burden and international obligations.

To sum up, Vietnam proves to be cautious, if not reluctant, to apply for BRI loans, meaning the implementation of the BRI in Vietnam is likely to be slow.

In the coming years, Vietnam may apply for one or two “pilot” projects to get a better assessment of BRI loans. Due to rising public debt, Vietnam may refrain from applying for government-to-government loans. Instead, it may encourage domestic private investors to apply for BRI loans from the AIIB to construct infrastructure projects under the BOT model. This measure would also reduce the political and strategic implications of BRI loans for Vietnam.

Vietnam’s future perception of the BRI will also depend on the commercial terms of BRI loans as well as the credibility of Chinese contractors and technologies. In this regard, Vietnam will not only observe the performance of China-funded projects within the country, but also BRI-funded projects in other parts of the world.

Finally, the ongoing South China Sea disputes may prove to be a wild card in determining the BRI’s future prospects in Vietnam. Should the dispute intensify and bilateral relations come under greater pressure, Vietnam will become more sensitive to the political and strategic implications of the initiative. By the same token, if the situation remains calm, and the two sides achieve progress in the management of their disputes, Vietnam will be more willing to embrace the BRI.

*Dr. Le Hong Hiep is a Fellow at the ISEAS-Yusof Ishak Institute in Singapore. This article is based on a paper originally published by ISEAS. The opinions expressed are his own.