Published 13 Nov 2024
Chinese investments in Vietnam have surged. But they bring not only opportunities but also challenges for the latter.
Since the US–China trade war started in 2017, Vietnam has become an increasingly popular choice for multinational corporations (MNCs) seeking to diversify their supply chains away from China to mitigate geopolitical risks. According to the General Statistics Office (GSO) of Vietnam, foreign investors pledged to invest a total of US$248.3 billion in 19,701 projects in the country (see Figure 1) for the 2017-2023 period. This amount accounts for a staggering 52.8 per cent of Vietnam’s cumulative registered foreign direct investment (FDI) since the country adopted economic reforms in the late 1980s. This trend has continued in 2024, with the country recording a remarkable US$27.26 billion in new registered FDI by the end of October.
Vietnam a Top FDI Destination
Figure 1 – Registered FDI in Vietnam (2017-23)
Chinese investors have played a significant role in driving this trend (Figure 2). By end-2023, China had risen to become the sixth-largest foreign investor in Vietnam, with a total registered capital of US$27.1 billion. This marked a considerable increase from its previous position as the ninth-largest investor, with a cumulative registered capital of approximately US$8 billion by 2014. In the first ten months of 2024, China was also the second-largest foreign investor in Vietnam after Singapore, with a total investment of nearly US$3.61 billion for this period.
Chinese FDI in Vietnam Surges
Figure 2 – Registered Chinese FDI in Vietnam (2014-23)
It is worth noting that if investments from Hong Kong were included, the accumulative Chinese FDI in Vietnam would surge to US$61.3 billion by the end of 2023. This would make China the fourth-largest foreign investor in the country after South Korea, Singapore, and Japan. Additionally, it is possible that a significant amount of Chinese capital has been invested in Vietnam through vehicles established in third countries, including tax havens and regional economic hubs such as Singapore. If these investments are to be taken into account, China could potentially rank among the top three foreign investors in Vietnam in terms of accumulative registered FDI.
The surge in Chinese FDI in Vietnam can be attributed to two key factors. First, the ongoing trade war between the US and China and US tariff barriers imposed on various Chinese goods have prompted Chinese companies to relocate part of their manufacturing operations to other countries, including Vietnam, in order to bypass these barriers. This trend is most evident in the solar panel industry, where five out of the seven largest producers in Vietnam are Chinese-owned.
Second, Chinese investors are seeking to diversify their risks and reduce their dependence on the Chinese market, particularly in light of the country’s economic slowdown, ageing population, and stricter government regulations. Vietnam offers several advantages in this regard, including its strategic location, inexpensive labour, decent infrastructure, and access to global markets through 17 free trade agreements. Additionally, the close proximity between China and Vietnam reduces logistical costs for Chinese manufacturers when importing intermediate goods from their China-based suppliers. This further incentivises them to establish factories in Vietnam.
Hanoi should exercise caution when approving Chinese projects that aim to use Vietnam as a conduit to bypass US tariff barriers. It is also important for Hanoi to take a more selective approach and even be prepared to reject projects from China that are labour- or resource-intensive.
The rise in Chinese investment in Vietnam helps strengthen the relationship between the two countries. From Beijing’s point of view, closer economic ties with Vietnam will solidify its influence over the country and help prevent Vietnam from aligning with its strategic rivals, particularly the US. Meanwhile, Vietnam appreciates Chinese investments as an important source of resources to facilitate its goal of becoming a high-income, developed economy by 2045. More Chinese money parked in Vietnam also means that the latter will be in a better bargaining position to deal with Beijing’s aggressiveness in the South China Sea.
However, increased Chinese FDI also presents Vietnam with new challenges. Despite there being no explicit pressure from the US on Vietnam to limit economic interactions with China, there is a possibility that the US may hesitate to deepen its ties with Vietnam if Hanoi continues to grow closer to Beijing economically. This is due to the fear that America’s strengthened trade and investment ties with Vietnam, particularly in high-tech sectors, could ultimately benefit Beijing. Such a perception may also spill over into strategic cooperation, further weakening mutual trust and damaging bilateral ties in the long run.
Furthermore, the practice of Chinese manufacturers using Vietnam as a conduit to bypass US tariff barriers poses a significant risk for Vietnam, especially during the second Trump administration. In the solar panel industry, for example, Chinese companies’ heavy investment in Vietnam has resulted in a significant increase in Vietnamese solar panel exports to the US. In fact, in 2023, these exports reached a value of US$4.2 billion, accounting for 26 per cent of all solar panel imports into the US that same year. As a result, in April 2024, the Solar Energy Manufacturers Coalition of the United States successfully applied for anti-dumping and countervailing duty investigations on solar energy panels imported from Vietnam. If the second Trump administration were to expand these investigations to other products, it could lead to potential sanctions on Vietnam’s exports, causing harm to both the Vietnamese economy and Vietnam–US ties.
As part of his electoral campaign, Trump said he would raise tariffs on Chinese goods up to 60 per cent if he were to be re-elected. If he follows through on this, Vietnam can expect to see a continued influx of investment from both global and Chinese sources in the upcoming years as investors continue to diversify their supply chains away from China. While this is positive news for Vietnam, the country will likely face closer scrutiny from the Trump administration. In light of this, Hanoi should exercise caution when approving Chinese projects that aim to use Vietnam as a conduit to bypass US tariff barriers. It is also important for Hanoi to take a more selective approach and even be prepared to reject projects from China that are labour- or resource-intensive. Instead, the focus should be on attracting investment in high-tech industries and critical support sectors. By doing so, Vietnam can take advantage of the increasing Chinese investment while minimising potential economic and geopolitical risks.
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Le Hong Hiep is a Senior Fellow and Coordinator of the Vietnam Studies Programme at ISEAS – Yusof Ishak Institute.
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