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Belt and Road

AIIB makes first loan to Vietnam bank amid South China Sea tensions

Bank's $100m offer to VP Bank is Beijing's olive branch to Hanoi, analyst says

The China-led Asian Infrastructure Investment Bank, which has 57 founding member states, is making its first loan to Vietnam, as Beijing looks to further its Belt and Road Initiative, analysts said.    © Reuters

HANOI -- Beijing-led Asian Infrastructure Investment Bank has approved a loan of $100 million to a Hanoi-based commercial bank, its first commitment to a Vietnamese bank as bilateral tensions grow in the South China Sea.

AIIB said in a news release on July 17 that it would "support VP Bank's trade finance and working capital finance" with the fresh loan. VP Bank, officially known as Prosperity Joint Stock Commercial Bank, is one of Vietnam's key private banks. Vietnam is one of AIIB's 57 founding members.

AIIB Vice President of Investment Operations D.J. Pandian said the loan was AIIB's first intermediary financing in Vietnam and Southeast Asia and was aimed at helping the nation recover from the COVID-19 pandemic. AIIB expects VP Bank to increase financial access to small- and medium-sized enterprises.

Vietnam's export-led economy has been severely hit in recent months despite its efficient handling of the pandemic. The country's gross domestic product grew just 0.36% in the second quarter, down sharply from 3.8% in the previous. The International Monetary Fund has forecast that Vietnam's real GDP growth will drop to 2.7% in 2020 from 7% in 2019.

Analysts said the $100 million loan is linked to AIIB's clear lending goal to support its Belt and Road Initiative, Beijing's global infrastructure development strategy.

"The fresh loan from AIIB could be actually used for a China-related infrastructure project in Vietnam," an analyst said, as VP Bank typically lends to infrastructure projects. VP Bank also told a closed-door meeting in May that it catered to businesses engaged in bilateral trade between Vietnam and China.

During Chinese President Xi Jinping's visit to Hanoi in November 2017, the two countries signed a memorandum of understanding on the "Two Corridors, One Belt" framework and BRI. The framework was proposed by China in 2003 to promote bilateral economic cooperation by improving connectivity between Yunnan and Guangxi with 12 cities and provinces in North Vietnam.

Experts said however, the agreement did not guarantee that the BRI would achieve breakthroughs in Vietnam in the foreseeable future.

A political analyst said the AIIB loan could be seen as Beijing's olive branch to Hanoi to encourage the government to relax its stance in the disputed South China Sea. AIIB's announcement came amid protests from Hanoi after Beijing established two new districts in the contested waters. Hanoi is believed to be considering bringing Beijing to an international court to seek resolution.

Despite the initial negative impact of the COVID-19 outbreak, VP Bank recorded a 51.6% jump to 5.2 trillion dong ($224.7 million) in net profit in the first half of 2020 from a year ago. Its full-year pretax profit target in 2020 is 10 trillion dong, down just 1% from the previous year.

VP Bank claims on its website that it is among the top five private commercial banks and the top three private retail commercial banks in terms of lending and profitability.

"VP Bank is not in great need of fresh capital compared with other Vietnamese lenders," an industry analyst based in Vietnam told the Nikkei Asian Review. Following the central bank's orders, VP Bank announced in 2019 it had met Basel II, the international requirements for cash reserves to ensure safe operation of banks.

Other Vietnamese banks, on the other hand, are facing challenges as local businesses are scaling down production and consumption is slowing due to the pandemic.

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