Why are relations between China and Vietnam so strained again?

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Renewed tension

The economic and political relations between China and Vietnam, also referred to as “Sino-Vietnamese relations,” have never been at ease since the two countries fought a month-long war in 1979. Strains in their relations deepened in 2009, when China presented a claim to 80% of the South China Sea to the United Nations Convention on the Law of the Sea.

The importance of having a claim over the area

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Having a claim over the South China Sea is particularly important to both sides, since it involves claims on the possession of two island groups, the Paracels and Spratlys, and more importantly the right to explore and exploit the natural resources in and below the waters surrounding the islands. Although proven reserves haven’t yet been forthcoming, the most optimistic estimates from China suggest that the potential oil resources of the Spratly and Paracel Islands could be as high as 213 billion barrels of oil and the area is also rich in natural gas.

In a broader context, the Asian waterways are packed with trade routes representing the world economy’s pulse. According to the U.S. Energy Information Administration, every year, nearly one-third of the crude oil supply globally and more than half of liquefied natural gas shipments pass through the South China Sea. Half of the world’s merchant fleet (by tonnage) travels through the South China Sea each year.

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Moreover, large multinational corporations with huge potential for developing the area along with providing abundant employment opportunities have established their presence in the area. For example, Nike Inc. (NKE), one of the biggest American multinationals in footwear, has contracts with 170 factories in six countries in Southeast Asia. The company employs close to 530,000 workers in that area.

The standoff with Vietnam has also exploded into riots against foreign-owned businesses—including many with no ties to China whatsoever—that threaten to reverse years of progress in attracting foreign manufacturing to Vietnam. However, firms like Wal-Mart (WMT) will see no big impact from the Vietnam protests since they source from many countries.

Rising tensions in the area already reflect in the volatility in the performance of exchange-traded funds (or ETFs) like the iShares FTSE/Xinhua China 25 Index Fund (FXI), which is the largest ETF in the Asian-stock category and which tracks an index of the 25 largest and most liquid Chinese companies, as well as the VanEck Vectors Vietnam ETF (VNM), which has exposure to publicly traded companies in Vietnam that generate at least 50% of their revenues from Vietnam. Emerging market ETFs like the iShares MSCI Emerging Markets ETF (EEM) are also popular in the emerging markets category.

The tensions over the South China Sea are causing more damage than meets the eye, especially for the Vietnamese economy. The next part of this series shares an overview of what’s behind the recent tensions and agitations between the two strongly linked countries.

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