Electricity demands could limit Beijing-Hanoi rift by Ben Bland in Hanoi and Leslie Hook in Beijing

[FT] With the long-running maritime dispute between China and Vietnam threatening to boil over once again, Nguyen Tan Dung, Vietnam’s prime minister, warned recently that his country would “resolutely fight activities that infringe our sovereignty”.

However, Vietnam’s reaction to perceived Chinese aggression in the South China Sea is likely to be tempered by the fact that Beijing is increasingly driving Vietnam’s economy. As Vietnam faces another year of debilitating power cuts and the government battles against severe financial headwinds, China is stepping into the breach.

With Vietnam unable to produce enough power to meet demand, which is increasing by about 15 per cent a year, its northern provinces import electricity from China – 6 per cent of the country’s total supply according to Electricity of Vietnam, the state power monopoly.

Far more important is China’s role in building the infrastructure needed to meet Vietnam’s future energy needs. Hanoi has kept the price of electricity much lower than in neighbouring Cambodia, China and Laos, making it very difficult for most foreign investors to develop profitable power projects.

However, with deep pockets, Chinese policy banks such as China Development Bank and China Export-Import Bank have offered billions of dollars of concessional loans for new power stations in Vietnam.

In return, large Chinese energy groups such as Dongfang Electric, Harbin Power Equipment and Shanghai Electric have been awarded lucrative contracts to provide equipment and build power stations across Vietnam.

The lending by CDB and China Eximbank is part of a wider global push by Beijing to reduce its dependency on western export markets and extend its commercial reach into developing countries.

US, European, Japanese and South Korean energy companies have long been interested in Vietnam’s underdeveloped power sector. However, they are increasingly being trumped by Beijing’s unparalleled ability to throw cash behind its emerging industrial titans.

One executive from a large Japanese power group said it was very difficult to compete with Chinese companies given their lower pricing and ready access to cheap state credit.

Yet, with a touch of irony, China is now seeking to emulate Japanese policy from 20 years ago, when it brought technology and financing for power projects to Indonesia, said Mark Hutchinson, Singapore-based senior director at IHS CERA, an energy consultancy,

Despite the territorial dispute and a long history of confrontation, economic relations between Vietnam and China are deep, if uneven. Vietnam ran a trade deficit of $11.6bn with China last year, exporting low value commodities such as crude oil, rubber and seafood, while importing processed goods such as machinery, chemicals and electronics.

Analysts at Citigroup, the investment bank, argued in a recent note to clients that strong China-Vietnam economic interests could help prevent the escalation of tensions around the South China Sea.

However, some Vietnamese observers fear that their country’s reliance on their northern neighbour will leave them dangerously exposed if relations deteriorate.

“If you are too dependent on one partner, they can use all kinds of measures to cause many problems for our economy,” said Nguyen Quang A, a former government adviser who took part in recent, rare protests against China’s perceived maritime bullying tactics.

Though Hanoi is rolling out the red carpet for Chinese energy companies at present, if push comes to shove, Vietnam’s pragmatic leaders will put national sovereignty first, argued Ernest Bower, director of the Southeast Asia programme at the Center for Strategic and International Studies in Washington.

“I suspect that if the Vietnamese perceive that the Chinese have too much market share, policies on power will start to move towards world class standards so international companies can finance and build power plants competitively in Vietnam,” he said.

Additional reporting by Gwen Chen in Beijing

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