The Belt and Road Initiative in Vietnam: Challenges and Prospects

By Le Hong Hiep, Fellow at ISEAS – Yusof Ishak Institute

Executive Summary

Vietnam is offering diplomatic support to China’s Belt and Road Initiative (BRI), but is cautious about applying for loans from it.

This attitude can be explained by:

  • Its distrust of Beijing and concerns about the strategic implications of the Initiative in the context of the South China Sea disputes;
  • The unattractive commercial terms and conditions of Chinese loans; and
  • Vietnam’s access to other options.

Hanoi may start by applying for a couple of “pilot” projects, especially through private investors, in order to get a better assessment of the BRI.

Although the actual implementation of the BRI in Vietnam may be slow, there is little doubt that Hanoi will continue to lend diplomatic support to the Initiative.

As the BRI is about China’s stature as a benevolent rising power, Vietnam’s diplomatic support for it will still matter to China.

BRI’s Appeals and Vietnam’s Initial Reactions…
The Downsides of BRI Loans and Vietnam’s Hesitations…
BRI’s Prospects in Vietnam

The above analysis suggests that despite Vietnam’s enormous need for infrastructure investment and its largely positive responses to the BRI so far, Vietnam will be cautious, if not reluctant, in applying for BRI loans. As a consequence, the implementation of the BRI in Vietnam is likely to be slow.

So far, no new infrastructure project in Vietnam has been officially labelled as BRI-funded, although the Cat Linh – Ha Dong metro line in Hanoi, which has been under construction since October 2011, has been quietly classified as such by both sides. More specifically, the initial total cost for the project was US$552 million, of which US$419 million came from loans provided by China Eximbank. Later, however, due to cost overruns, the total investment was increased to US$891 million and China agreed to provide an additional loan of US$250 million for the project. It is this new loan, which was released in 2017, that has unofficially been considered by both sides as part of the BRI.

At the same time, AIIB has indicated that it is seeking to finance suitable projects in Vietnam, with the first expected to be identified in 2017. However, according to AIIB’s website, no such project has yet been approved or even proposed.

In coming years, whether the BRI will be successfully implemented in Vietnam will continue to depend on Hanoi’s evolving perception of the Initiative. On the one hand, Vietnam’s budget deficit is likely to persist, causing public-funded investment in infrastructure projects to fall. As such, Vietnam’s interest in the BRI is likely to stand. Vietnam may apply for one or two “pilot” projects to get a better assessment of the upsides as well as downsides of BRI loans. However, 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, especially from AIIB, to construct infrastructure projects under the BOT model. This measure will also reduce the political and strategic implications of BRI loans for Vietnam.

Vietnam’s 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. In other words, in order to ensure the BRI’s long-term success in Vietnam and elsewhere, it is essential for China to make sure that the performance of the first batch of BRI projects meet the expectations of not only the beneficiary countries but also of the international community.

Finally, the ongoing South China Sea disputes may prove to be a wild card in determining Vietnam’s perception of the BRI, and thus its future prospects in the country. Should the dispute intensify and bilateral relations come under greater tensions, 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 the disputes, such as the conclusion of a Code of Conduct (COC), Vietnam will be more willing to embrace the BRI.

In sum, there is little doubt that the BRI will face significant challenges in Vietnam. China should acknowledge these challenges and work with both domestic stakeholders and Vietnamese partners to address them. In the meantime, although the actual implementation of the BRI in Vietnam may be slow, it is almost certain that Hanoi will continue to lend diplomatic support to the Initiative as a measure to strengthen the overall relations with Beijing. And as the BRI helps promote China’s stature as a benevolent power and provider of international public goods, such diplomatic support for the BRI from Vietnam, even if limited, will still be of value to China.

This commentary first appeared in ISEAS Perspectives 2018 no 18. Read the original article here.