AIIB grants first loan to Vietnamese bank amid South China Sea tensions

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

The AIIB said in a press release on July 17 that it would “support trade finance and working capital finance for VP Bank” with the new loan. VP Bank, officially known as Prosperity Joint Stock Commercial Bank, is one of Vietnam’s leading private banks. Vietnam is one of the 57 founding members of the AIIB.

AIIB Vice President of Investment Operations DJ Pandian said the loan was AIIB’s first intermediary funding in Vietnam and Southeast Asia and aimed to help the country recover from the COVID-19 pandemic. The AIIB expects VP Bank to increase financial access to small and medium enterprises.

Vietnam’s export-driven economy has been hit hard in recent months despite its effective handling of the pandemic. The country’s gross domestic product grew only 0.36% in the second quarter, down sharply from 3.8% in the previous quarter. The International Monetary Fund has forecast Vietnam’s real GDP growth to fall to 2.7% in 2020, from 7% in 2019.

Analysts said the $ 100 million loan was tied to the AIIB’s clear lending goal to support its “Belt and Road” initiative, Beijing’s global infrastructure development strategy.

“The new AIIB loan could actually be used for a China-related infrastructure project in Vietnam,” one analyst said, as VP Bank typically lends to infrastructure projects. VP Bank also said in a closed-door meeting in May that it was addressing companies 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 the 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, that the deal did not guarantee the BIS would make inroads in Vietnam for 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 position in the contested South China Sea. The AIIB announcement came amid protests from Hanoi after Beijing established two new districts in disputed waters. Hanoi is believed to be considering taking Beijing to an international tribunal for a resolution.

Despite the initial negative impact of the COVID-19 outbreak, VP Bank recorded a net profit of 51.6% at 5.2 trillion dong ($ 224.7 million) in the first half of 2020 compared to it a year ago. Its pre-tax profit target for 2020 is 10,000 billion 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 does not have a great need for fresh capital compared to other Vietnamese lenders,” a Vietnam-based industry analyst told the Nikkei Asian Review. Following orders from the central bank, VP Bank announced in 2019 that it had met Basel II, the international cash reserve requirements to ensure the safety of banks’ operations.

Other Vietnamese banks, on the other hand, face challenges as local businesses cut production and consumption slows due to the pandemic.

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