Value chain risk: Will Vietnam end up like another Chinese province?

Vietnam's anti-graft campaign is moving prosperity closer to the Chinese border, while leaving Ho Chi Minh City, until recently the country’s commercial centre, in the dust.
Vietnam's anti-graft campaign is moving prosperity closer to the Chinese border, while leaving Ho Chi Minh City, until recently the country’s commercial centre, in the dust.

Summary

  • Global supply-chain diversifiers had better stay alert. Local politics could mean Vietnam develops Chinese characteristics.

Vietnam’s anti-corruption drive, which the ruling Communist Party chief Nguyen Phu Trong likened to a “blazing furnace," is running hot. This year alone, two of the four pillars of power, including the chairman of the parliament and the country’s president, left their posts amid graft allegations. Last month, Truong My Lan, a real estate tycoon and Vietnam’s richest woman, was sentenced to death for her role in a $12 billion fraud case that involved Saigon Commercial Bank, one of its largest lenders. Eighty-five others were sentenced on charges ranging from bribery to abuse of power.

There are now concerns among investors that Vietnam, perfectly positioned to gain from the US-China rivalry, is not all that politically stable. With Hanoi’s power vacuum getting bigger, it’s unclear who will have the top job. Trong, at the age of 80, is widely expected to step down at the next Party Congress in January 2026.

What’s clear, however, is that this anti-graft campaign is moving prosperity closer to the Chinese border, while leaving Ho Chi Minh City, until recently the country’s commercial centre, in the dust. At this rate, only northern Vietnam may live up to its full potential—at the expense of the south.

As global manufacturers diversify their supply chains, money has been going to the northern region around the capital city of Hanoi and the eastern port of Haiphong. Quang Ninh, the northeast coastal province where the tourist hotspot of Halong Bay is located, was the largest recipient of foreign direct investments last year. Swedish auto-safety systems maker Autoliv is planning a $160 million factory there, as is Taiwan-headquartered auto supplier Boltun, just to name a few.

At issue in Vietnam is infrastructure, which smartphone and electric vehicle manufacturers need for their mega factories. Vietnam, shaped as a long and curvy letter S, still relies on roads that can be narrow, congested and bumpy for most freight traffic. It ranked 43rd in the World Bank’s latest Logistics Performance Index, down from 39th in 2018 when the US-China trade war began.

Trong’s anti-graft campaign has an unfortunate side effect—public procurements for infrastructure projects have stalled. Officials are too scared to make any decisions for fear of inciting scandal and punishment. In the first four months of this year, the government disbursed only 15% of what it had planned for public investments. To foreigners, the most glaring and disappointing example is Ho Chi Minh City’s much-anticipated first metro line, which began construction in 2012 and was originally scheduled for completion in 2018. It is still not open yet.

This has made Quang Ninh all the more attractive. Perhaps reflecting the top politician’s own bias—Trong grew up in Hanoi— the government has spent more on infrastructure near the capital. A new deep-sea port at Haiphong and Expressway 04, which connects to Hanoi, began operations in 2018. The opening of Expressway 06 in 2022, which links Haiphong to the city of Mong Cai near the Chinese border, gave the area a significant tailwind, too.

Quang Ninh’s geographical advantage is in full display especially if the new factories need essential stuff, such as electricity. With all the foreign manufacturers pouring in, power demand has been soaring. But almost no decisions on energy infrastructure have been taken since the anti-corruption campaign started in 2017, noted Gavekal Research. 

A year ago, amid shortages exacerbated by scorching heat, Vietnam struck a deal to import electricity from China’s neighbouring Guangxi province. This kind of emergency solution to avert production halts would not be possible if a factory was built in the south. Vietnam has been a net energy importer since 2015.

Lan’s death sentence has created some unease among businesspeople. A Saigon native and ethnic Chinese, she owned extensive property portfolios in the city. Her husband, Hong Kong property tycoon Eric Chu, went on a fire sale last year when Lan was arrested. Her companies were among the first major privately owned businesses that landed in the government’s crosshairs, showing Hanoi was willing to take the campaign beyond its ranks. 

Having gone through crackdowns of their own, Chinese entrepreneurs looking to enter Vietnam, for one, prefer to be aligned with the interests of the political elite, which does not appear to be in the south.

In many developing nations, a little bit of corruption can grease the wheels of commerce, and a lack of it could stall progress. Hanoi may want ‘bamboo diplomacy’ and more friends than foes, as Vietnam becomes more dependent on China. But its internal politics seems to be turning the northern part of the country into a de-facto Chinese province. ©bloomberg

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