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As standoff over rig deepens, Vietnam's China dependent factories worry; suppliers stay away

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HANOI, Vietnam - Like thousands of other factory owners in Vietnam, Nguyen Van Phuc relies on China for the expertise and raw materials needed to keep his production line humming. But spiking tensions between Hanoi and Beijing over maritime territorial claims are threatening that relationship and his bottom line.

Chinese technicians scheduled to upgrade his equipment are too spooked to visit following anti-China violence. His Chinese suppliers no longer accept cash on delivery, fearing an even sharper deterioration in relations would leave them out of pocket, so Phuc must now pay more from a third-party supplier.

"One hundred per cent of Vietnamese companies just want to have peace to do their business," he said at his electric cable company in Vietnam's capital, Hanoi.

China has long feuded with its Southeast Asian neighbours over who owns what in the South China Sea, one of the world's busiest shipping lanes and a region potentially rich in oil and natural gas. In recent years, Beijing has been more forceful in pressing its expansive claims, bringing it into conflict with Vietnam and the Philippines.

The latest upheaval followed a decision by Beijing on May 1 to plant a massive oil rig in a part of the sea long claimed by Vietnam. Patrol ships sent by both sides to the area have played a cat and mouse game of harassment, with some colliding. Deadly anti-China riots broke out in Vietnamese industrial parks.

While a shooting war on the high seas is still a remote possibility, relations are unlikely to get better anytime soon. With China ignoring Vietnam's appeals for it to withdraw the rig, Hanoi is threatening an international legal challenge to Beijing's claims. That carries the risk that China, the world's second biggest economy, will retaliate economically against its much smaller neighbour, a path Beijing has been willing to go down before with other countries.

Vietnam's authoritarian rulers are in a difficult position: their legitimacy rests in large part on an ability to deliver rising living standards to the country's 90 million people. Good relations with China, Vietnam's largest trading partner, a major source of development funding and an important investor in the textile and power industries, are vital to that.

Yet there is deep anger in the government over Beijing's latest move, as well as domestic pressure for it to respond. Some analysts are predicting an economic slowdown as a result of the tensions, even as they recognize that Vietnam's dependence on China means it can't afford to risk a complete breakdown in ties.

Nguyen Duc Thanh, the director of Vietnam's Economic and Policy Research Center, said the current tensions could result in a 1 percentage point drop in gross domestic product growth this year due to delays in infrastructure projects, particularly power plants that are being developed with Chinese expertise.

"China is building a lot of them. I don't think they will totally stop, but they will be delayed. And time is money," he said.

Other China-linked factors that could drag on growth this year include trade being hurt by tougher customs clearance at the land border, fears of greater instability deterring foreign investment, and a drop in Chinese tourists. Visitor arrivals from China totalled 2 million last year, about a quarter of total foreign visitors.

For many companies in Vietnam there is little alternative but to trade with China, which supplies its factories with everything from the components to make smartphones to the fiber that its cheap labour force weaves into sweatshirts and t-shirts for international retailers.

But despite these ties, China has never been very popular in Vietnam, where the country is seen by many as untrustworthy, aggressive neighbour. One legacy of the current upheaval may be that companies diversify their suppliers, said Peter Sorenson, the managing director of a Vietnam-based investment banking firm.

"This could psychologically reinforce the case for a lot of business to find alternative import sources," he said.

Last year, the Philippines filed a complaint against Beijing before an international tribunal in The Hague challenging the legality of its territorial claims in the South China Sea. It did this despite threats from China, which wants one-on-one talks with each of its rival claimants.

Vietnam stayed silent then, but Beijing's oil rig gambit appears to have changed its geopolitical calculations.

In 2012, China banned banana imports from the Philippines, ostensibly for health reasons but widely interpreted as related to the territorial dispute. Norway's salmon exports to China have collapsed since 2010 when the Oslo-based Nobel Peace prize committee honoured a jailed dissident.

But Beijing will have to consider the potential cost to Chinese businesses before taking any measures against Hanoi.

"The thing with using economics as a weapon is that it is artillery fire in both directions," said Jason Morris-Jung, a Vietnam expert at the Institute of Southeast Asian Studies. "If you punish a seller in Vietnam, you also hurt a buyer in China, and vice versa."

Phan Minh Chinh, who has a large garment factory in the north of the country that sources 80 per cent of its yarn from China, said he feared that emotions might get out of hand.

"Conflict with China would come with an economic cost, but maybe the leaders are no longer thinking about that. This is politics now," he said.

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