Violent riots targeting Chinese businesses erupted in Vietnam this week, following a clash between Chinese and Vietnamese ships in disputed waters.
The latest skirmish occurred near an oil rig owned by Chinese oil giant CNOOC (China National Offshore Oil Company) (NYSE:CEO), after Chinese ships allegedly rammed and sprayed water cannons at Vietnamese patrol ships that approached the rig. The Vietnamese government claims that several sailors were injured during the incident. The rig is located 120 miles off the coast of Vietnam in waters claimed by both Vietnam and China.
China claims most of the South China Sea as its sovereign territory, which has caused similar conflicts with Malaysia, the Philippines, Brunei, and Taiwan in the past.
In response to the incident, nearly 20,000 protesters looted and set fire to foreign-owned businesses across industrial zones in southern Vietnam. Although the violent riots initially targeted Chinese businesses, they eventually ransacked all businesses with Chinese names -- including businesses from Taiwan and Singapore. At least 20 people have been killed so far, according to The Guardian.
These riots, which could undo years of economic growth for Vietnam, highlight several key facts that investors in Asia should be aware of -- the importance of oil in the region, inter-regional outsourcing in Asia, and the dangers of economic growth outpacing political stability in developing nations.
It's all about the oil
China surpassed the U.S. as the largest oil importer in the world last year. Back in 2006, crude oil imports accounted for 47% of Chinese oil consumption. By 2015, Chinese crude oil imports will rise to approximately two-thirds of total oil consumption. To feed that ravenous demand for oil imports, China diversified its global suppliers through major investments in Africa, the Middle East, and other regions.
China's oil industry is controlled by three central state-owned enterprises (SOEs): CNOOC, Sinopec (NYSE:SNP), and CNPC (China National Petroleum Company)/PetroChina (NYSE:PTR). In China, SOE chairmen/CEOs hold a rank equivalent to a provincial governor, which grants them tremendous clout in shaping China's foreign policies.
The influence of those three companies has pushed China to invest in some controversial, conflict-ridden regions across the world -- including South Sudan, Libya, and Iran. China also holds a near monopoly of crude oil exports from Ecuador. China frequently offers large loans to poorer nations to secure diplomatic and economic ties. Richer nations are not immune to China's influence -- CNOOC easily expanded into Canada via its $15.1 billion acquisition of oil and gas producer Nexen in 2012.
That demand for oil is fueling these territorial conflicts in the seas near China. China wants to claim the Senkaku/Diaoyu Islands, which are also claimed by Japan and Taiwan, for its rich deep sea oil reserves. That's also why CNOOC set up an oil rig by the Paracel Islands near Vietnam.
In other words, China is treating the South China Sea the same way that the U.S. treats the Gulf of Mexico, but it is ignoring other territorial claims to those waters. China estimates that there could be 213 billion barrels of oil in the South China Sea -- an amount that would exceed the reserves of every nation in the world except for Venezuela and Saudi Arabia.
Vietnam's problem: cheap labor and a widening wealth gap
Last year, Vietnam surpassed China, Hong Kong, and Taiwan as the new top spot for companies to set up overseas manufacturing operations. Companies were attracted by Vietnam's open economic policies, strategic geographical location, and cheap labor. The influx of foreign capital has been astounding -- foreign investments in Vietnam jumped from $169 million in 2010 to $4.45 billion in 2013. South Korea, Singapore, Hong Kong, Taiwan, and Japan were the top investors.
The average annual income of a Chinese worker is currently $7,500. An average Taiwanese worker earns $14,600 per year, while the average Hong Kong worker earns $22,000. By comparison, the average Vietnamese worker earns $2,000 per year -- not much by Chinese standards, but still 14 times higher than it was 21 years ago. That low average wage has made Vietnam a lucrative place for Asian companies to outsource their operations, which has helped Vietnam retain a robust annual GDP growth rate of 5.4% in 2013.
However, the income gap is widening. According to Singapore-based Wealth-X and UBS, 195 people in Vietnam (out of a population of 89 million) held combined assets of $20 billion -- comprising roughly 14% of Vietnam's entire GDP. Meanwhile, the lower class remains poor due to inadequate education and training, which restricts them to basic factory jobs. A 2010 survey by the Vietnamese government found that only 40% of the workforce had any sort of marketable skills or training.
Trading territorial sovereignty for economic promises
In conclusion, the ongoing riots in Vietnam represent a culmination of years of tension caused by China's territorial incursions, the perceived Chinese domination of the nation's economy, and a widening wage gap between Vietnamese bosses and their employees.
Vietnam, like many countries across Asia, is entangled in a love-hate relationship with China, in which China promises economic growth at the cost of territorial sovereignty. China is counting on these countries to value economic growth more than their oil-rich oceans, and it's a gambit that could work. However, it's also a reckless strategy that is endangering lives and hurting businesses across Asia, which rely heavily on Vietnamese labor.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.