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Market Analysis and Risk Division June/2014

Analysis of Vietnam- China scenarios and recommendations of action plans. Market Analysis and Risk Division June/2014. Contents of Analysis. Why China is so persistent; Vietnam’s counter-tactics (Page 3-8) Scenario construction; general evaluations (Page 9-12)

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Market Analysis and Risk Division June/2014

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  1. Analysis of Vietnam- China scenarios and recommendations of action plans Market Analysis and Risk Division June/2014

  2. Contents of Analysis • Why China is so persistent; Vietnam’s counter-tactics (Page 3-8) • Scenario construction; general evaluations (Page 9-12) • Evaluations of impacts, Recommendations of solutions and specific action plans (Page 13-18) • Appendix 1: Classification of customers associating with China (Page 19-22) • Appendix 2: Evaluations of economic relationships between VN and China (Page 23-27) • Appendix 3: Evaluations of exported goods of Vietnam to China (Page 28-31) • Appendix 4: Evaluations of imported goods of Vietnam from China (Page 32-35)

  3. Why China is so persistent; Vietnam’s counter-tactics?

  4. Why is China so persistent on the East Sea and with Vietnam? • China is facing challenging and troublesome domestic issues: (1) In the provinces of Tan Cuong and Tibet, hundreds of people were dead in terrorist attacks or set themselves on fire in protest against the Beijing regime; (2) the campaign against corruption, especially in the military area- previously considered to be the “forbidden area” (3) Income gap increased significantly evidenced by the fact that the income of China’s top 20% richest is 18 times than that of the bottom 20% poorest people; (4) A part of the young Chinese generation has different viewpoints on lifestyles and western culture compared to the previous generations • The geopolitical factor: (1) the crucial the geographic location of the East Sea: 90% of the world’s import-export goods is transported by sea, 45% of which travels through the East Sea; (2) China’s strategy to transport oil and gas to seize the active position in the East Sea to overcome disadvantages of transporting through other routes; (3) The roadmap for the “Coastal Green” plan during the year 2000-2020 and the “String of Pearls" strategy to enhance maritime and military control over the East Sea. • The possibility of the US’ military intervention in the East Sea situation is very low: (1) Although U.S. defense potential is strongest, its expansion ability is limited, while China’s is growing at a rapid pace; (2) the U.S. has many other concerns in Ukraine, Syria and Iraq; (3) Vietnam is not the US’ ally

  5. China has 29 maritime routes (over a total of 39) through the East Sea and about 60% of import-export goods and 70% imported oil are transported through the East Sea About 70% of Japan’s imported oil and 45% of exported goods are transported through the East Sea annually Exported goods travelling through surrounding areas near the Hoang Sa and Truong Sa peninsula account for 42% of total value for Japan, 55% for South East Asia countries, 26% for new industrial countries, 40% for Australia and 22% for China

  6. Comments from experts internationally: • Exhibiting rough attitude on the East Sea issue helps President Xi Jinpingshowcase a strong image with authority power in front of the Chinese people domestically, which supports the addressing of domestic political problems and the implementation of economic reforms and the anti-corruption campaign, all outlined since his taking office in 2013, anticipating to touch upon sensitive areas. • "Mr. Xi wants to become a strong leader like Mao Zedong, who worships forcefulness. Which is why Xi Jinping repeatedly urged the Chinese army ready to fight and win in the war, " a comment from Nghe Lac Hung, a military expert from Shanghai. • Through expressing his powerful political style in the diplomacy measures with other countries on the East Sea, Xi Jinping wants to increase his trust level domestically. This move will help in the deployment of anti-terrorism campaigns in Xinjiang, Tibet to gain the support of the Chinese people, especially the young generation of China whose ideologies have gradually moved away from traditional values of this country.

  7. Vietnam’s counter-tactics: • Fighting in the field: Holding on, approaching close to the area, making public announcements to protest and demand for the withdrawal of the oil-rig, combining with many other measures to prevent or delay the deployment progress of the rig from the Chinese side. • Fighting in the diplomatic field: Initiating telephone conversations, sending official notes, communicating directly in forums and gaining supports from the international community (Meeting Embassy representatives of ASEAN countries, Russia, US, Japan, South Korea, India, Australia, EU, etc. in Hanoi; VN’s agency representatives in foreign countries scheduling meetings to inform the corresponding Ministry of Foreign Affairs; informing the United Nations) • Fighting through propaganda: Establishing special work groups to provide information and guidance on the journalism field, building specific communication and reaction plans; Scheduling international press conferences • Other measures: Considering legal measures; Certain unofficial information on the U.S.' proposal on forming military alliances (like NATO) with countries such as Japan, South Korea, the Philippines. etc.

  8. Scenario Construction and General Recommendations

  9. 3 main scenarios:

  10. Evaluations of each scenario’s impacts on the national level:

  11. General recommendations Monitoring the situations, providing warnings for each scenario:Need to monitor closely the VN-China situations to provide warnings and applying the scenarios (For example, currently status is understood as in Scenario 1. In cases, if current situations are evaluated to be corresponding to Scenario 3, the Crisis Management Committee will then be alerted. Risk Appetite: Considering factors relating to China when determining the risk appetite of the whole bank, including the total general limit for consistent control mechanism; or to provide timely immediate actions, the CEO may issue internal documents regarding this issue. The risk appetite needs to be reviewed for modifications/supplementations on the basis of classifying customers relating to China and in corresponding scenario setting. Including this issue in proposals for approval: Including information relating to China, if any, in proposals for limits/disbursements for decision making, basing on customer evaluations, risk appetite and developments of situations corresponding to each scenario. Information in proposals also includes import-export activities with China, whether the owner is Chinese, the extent to which customers are dependent on the China market (measured by the proportions of import-export to China with respect to the sum of total import-export values, or with respect to total revenue of customers) etc. Special attention must be paid to some customer groups: Customers relating to many activities/ factors with China; Customers exporting cassava, rubber, rice; or customers having significant liabilities (more than 50 billion VND) with TCB must be paid special attentions, monitored closely and refrained from increasing/ even not increasing their liabilities with TCB

  12. Evaluations of impacts, Recommendations of solutions and specific action plans

  13. Recommendations of action plans Division implementing Division coordinating Time frame Tasks • MarketAnalysis • Risk/ Strategy • Monitoring the warning status on the scenarios • On-going July • Business • Divisions • Supplementing/ modifying risk appetite submitted to the CEO/ ARCO • Risk July • Business • Divisions • Supplementing/ modifying the proposals for limits/ credits/ guarantees • Risk July • Supplementing the regulations for liquidity contingency plan (including Scenario 3) • Risk/Business • Divisions • ALM

  14. Appendix 1: Classification of customers associating with China

  15. Overview of liabilities and number of TCB’s customers having relationships with China

  16. Classifying number of customers into groups Total of Customers’ Liabilities with TCB

  17. Total liabilities with TCB for each customer group • Customers with liabilities • 50 < ≤ 100 bio • Customers with liabilities ≤ 50 bio Customers with liabilities > 100 bio Total liabilities • Customers exporting to TQ • 497.65 • 954.77 • 2,189.56 • 737.14 • Customers importing from TQ • 1,094.44 • 5,218.76 • 7,743.15 • 1,429.95 • Customers importing and exporting with TQ • 187.85 • 2,032.12 • 2,392.72 • 172.75 0 • Companies’ Owners are Chinese • 120.44 • 369.80 • 249.36 0 1,267.63 79.49 • Companies’ Owners are Chinese and Importing from China • 1,347.12 85.43 0 0 • Companies’ Owners are Chinese & also Importing & Exporting with China • 85.43 • 1,865.37 • 9,593.72 • 14,127.77 • 2,668.69 • Total liabilities

  18. Appendix 2: Evaluations of economic relationships between VN and China

  19. Commerce & investment relations between the two countries: BIG for Vietnam but small for China Vietnam China • Commerce • CN-VN commerce compared with the total commerce of each country • 19% • 1.6% 2. Exports to the nation’s partner compared with its total exports • 10% • 1% • 3. Imports from the nation’s partner compared with its total imports • 28% • 2% • Machinery, important production inputs 4. Characteristics of exports • Raw materials II. Investment • Inward FDI from the partner compared with the total inward FDI • 10.5% • 0.003% 2. Outward FDI to the partner compared with the total outward FDI • 0.04% • 2.59% 3. FDI areas • Real estate, textiles & garment • n/a Note: All figures in 2013 except VN’s outward FDI (2012)

  20. 10% of exports of VN are exported to China, equal to only 1% of the total imports of China

  21. 28% of imports of Vietnam are from China, equal to only 2% of the total exports of China.

  22. Evaluation: The probability of China imposing pressure on Vietnam’s economy is not high: • FDI enterprises in the supply chain: Several exports to and imports mainly from China (e.g. phones, computers, electronic products and components, ores and minerals) are related to FDI firms. Those firms are in the supply chain and not the subjects China wants to aim at. • VN could diverse into other markets: Several exports and imports could shift to another market in order to decrease dependence on China. For example, coal exported to Indonesia/South Korea; fibers / yarns exported to India; plastic materials exported to Japan and USA. These are potential markets with export values rising rapidly in recent times. Many items can be imported from ASEAN countries, India, Taiwan, South Korea (with geographical distance is not too far away and the price difference is not too large). • Chinese enterprises, which are mainly SMEs will also be affected if China applies economic pressure against VN. Meanwhile, despite negative impacts on Vietnam’s economy in the short term, it will boost Vietnam to diversify markets and reduce dependence on China in the long run.

  23. Appendix 3: Evaluating exports of Vietnam to China: Cassava, rubber and rice, having possibility of facing high risks

  24. Possibility of reducing dependence on China as an export market

  25. Appendix 4: Evaluations of Vietnam’s imports: can replace by markets that have traditional trading activities with VN: Korea, Taiwan, India, but may face risks relating to price, transportation costs and other costs relating to approaching or expanding to other markets besides China

  26. VN’s expandable import markets

  27. Conclusion on the items with high proportions imported from China • Generally, items imported from China can be replaced by VN’s traditional markets such as South Korea, Taiwan, ASEAN countries and India. • Goods can be imported indirectly in the form of 3rd party transit through Taiwan, ASEAN countries because they benefit from the same tariff policies applied by China as Vietnam. • A number of inputs with great proportions imported from China will possibly suffer risks such as fertilizers (50%), fabrics (46%), iron & steel (36%), machinery (35% ), raw materials for textiles (32%), chemicals (27%). The importation of these goods from other markets (instead of China) is possible but will be accompanied by many risks such as: • Higher prices for imports because it could be very hard to find out suppliers offering competitive prices as China. • Higher import tariffs than border trade transactions, higher transport costs due to further import markets. • Costs for research on new markets and adaptation to new commercial practices

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