Vietnam is in danger of losing its China +1 appeal

Vietnam is in danger of losing its China +1 appeal

Losing one president in a year -- unfortunate. Losing two? A worrying signal for foreign investors. Vietnam, the economic darling of Southeast Asia, has been thrust into the spotlight again because of a series of political earthquakes. The most recent is President Vo Van Thuong's resignation on March 20, making him the latest senior official to step down amid widening probes into some of the country's top leadership.

This fresh political uncertainty may rattle those who flocked to Vietnam in the aftermath of the US-China trade war, attracted by the talented and affordable labour market and the lack of political scrutiny from the US government. Vietnam was a huge beneficiary of the spat -- foreign direct investment surged 32% in 2023, with the country attracting nearly US$36.61 billion (1.3 trillion baht) worth of funds.

Companies looking to diversify their risk away from China set up factories and poured in investments. This year started strongly, too, with a record influx of foreign funds of over $4.29 billion in January and February, marking an increase of 39% compared to the previous year. It has been the poster child for what a nation should do when trying to find a way out of the Chinese doldrums, and has been pretty successful so far. But it needs to ensure that it presents a stable and strong image to the world to continue the current success.

Mr Thuong is the second leader to step aside in just over a year, and his resignation marks the shortest presidency in Vietnam's history. It isn't entirely clear what he's allegedly done wrong, beyond the official statement that spelled out in rather ambiguous terms his mistakes: He "violated regulations on what party members cannot do" and "took responsibility as a leader in accordance with the party's rules and the state's laws". The speculation is that this is all part of the Communist Party's crackdown on corruption within the ranks. While the role is largely ceremonial, it is still the second most powerful position within the party's political hierarchy -- so the resignation is significant.

The news is likely to send concern rippling through Washington, which has upgraded ties with Hanoi recently. The trip by US President Joe Biden last September was heralded as a "new stage" in relations. It is also a key part of the White House's Indo-Pacific strategy to help maintain a presence in the region and blunt China's influence. Any hint of instability within the Vietnamese government could change the outlook for the US, too.

Because of the opaque way in which the party operates, it's possible we will never know what happened. But this anti-graft push among the party's officials has been a feature of the Communist regime, mirroring what China has been doing in recent years. Earlier this month, police arrested three senior provincial party officials for allegedly receiving bribes. This is all in an effort to ensure that ideology stays pure.

The result, though, is an unnerving leadership vacuum at a time when one of the world's fastest-growing economies is facing a surprise decline in exports and concerns over inflation. The next National Congress isn't scheduled until 2026, which means that the nation once prized for its predictability is now facing a chaotic few years, unless a smooth path to succession is laid out. Political infighting and tribalism within the party could make this contentious. Vice President Vo Thi Anh Xuan will be acting president until parliament selects a new one.

The ambitious anti-corruption crackdown has yielded positive and negative outcomes, according to a report from the Singapore-based ISEAS Yusof Ishak Institute. It has been successful in reducing graft to some extent but has also led to disruptions in bureaucracy, while confidence among private businesses and foreign investors has taken a hit.

The government needs to ensure that there is a transparent legal framework to continue its efforts to clean up graft in both the public and private sectors to avoid any hint that these measures are a way to remove factions or political enemies from the party's rank and file. Otherwise, the glow that the Southeast Asian nation has caught from being China's +1 may not shine for much longer. ©2024 Bloomberg

Karishma Vaswani is a Bloomberg Opinion columnist covering Asia politics with a special focus on China. Previously, she was the BBC's lead Asia presenter and worked for the BBC across Asia and South Asia for two decades.

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