What rising tensions in Asia mean for investors

China is asserting its territorial claims increasingly aggressively, angering its neighbours. Meanwhile Thailand is in turmoil. Is political risk rising in Asia? Matthew Partridge reports.

What’s happening in Vietnam?

China’s decision to build an oil rig in a part of the South China Sea claimed by Vietnam has led to riots in several provinces. While Chinese factories were the original focus of the anger, protestors also targeted other foreign-owned firms, including those from South Korea, Taiwan and Singapore.

As Forbes’ Donald Kirk puts it, the disturbances seem to be “giving voice to a long litany of complaints against all those whom the Vietnamese see as exploiting them”.

The Chinese government has already had to evacuate 4,000 citizens from the country, and one company – Metallurgical Corp of China – has confirmed that four of its staff were killed.

Hanoi is attempting to restore order and has promised compensation, through loans, debt forgiveness and tax cuts. Despite this, Vietnam’s stock market has plunged, as foreign investors rush for the exit – it is down by more than 10% from its March highs.

Is this dispute solely about Vietnam?

No. China has been accused of stoking tensions generally by laying claim to parts of the South China Sea that were considered to be the territorial waters of other countries. As well as its argument with Vietnam, it is currently involved in disputes with Malaysia, Singapore, the Philippines and Japan.

Indeed, in February, Philippine president Benigno Aquino compared China’s expansionist policies to those of Germany in the 1930s. Beijing’s aggressive behaviour has also led other countries (most notably Japan) to increase military spending, prompting fears of an arms race. They have also attempted to form informal anti-Chinese alliances.

In response to this, on Tuesday, Chinese president Xi Jinping stated that Beijing is “committed to seeking peaceful settlement of disputes with other countries”. However, he warned that China would treat any new regional alliances as a threat to its security.

What role is the US playing?

America has been making a conscious effort to reduce regional tensions and discourage China from flexing its muscles. At the core of this policy is what’s being described as a “pivot to Asia”, whereby America refocuses its attention away from the Middle East to an extent, and towards the Far East.

This involves supporting regional bodies, building closer relations and economic links with other Asian countries, including the Trans-Pacific Partnership (a trade deal). However, it also involves supporting other countries in their disputes with China.

For instance, in April, President Obama reaffirmed Japanese ownership of the Senkaku Islands (which China claims). He also said that they fall under the longstanding US-Japan Mutual Security Treaty, implying that the US would use force to resist any unilateral attempt by China to seize them.

America also this week indicted five Chinese officials for alleged computer hacking – the most aggressive overt reaction yet in the low-level rumbling cyberwar between the two countries.

China has responded by strengthening its ties with countries that are seen as opposed to the US. For example, this week China and Russia finally signed off on a long-planned 30-year deal for Russia to supply gas to China by pipeline from Siberia.

Why does this matter?

Malcolm Arnold of The Wall Street Journal points out that the political disturbances and tensions surrounding China suggest that “political risks are returning to the fore in Asia”. Several analysts have expressed concerns that this instability threatens “to weigh on growth in a region that has been the world’s most dynamic over the past decade”.

Clearly, uncertainty over China’s growth prospects will not help promote political stability. But it’s not just China – the risks from political unrest can be seen clearly in the case of Thailand, which saw its economy contract by 0.6% in the first quarter of the year amid political turmoil.

However, although Thai stocks have fallen on news of the military involvement, the overall stock index is still up 10% from its level at the start of this year, so investors are yet to take a full hit.

Is there any positive political news?

In contrast to the tensions elsewhere in Asia, the stockmarket in India has risen by around 20% as it became clear that Narendra Modi, seen as pro-business, would become the next prime minister. However, even amid the excitement over Modi’s election, investors should perhaps be wary.

As The Economist notes, Modi’s political party has a reputation for anti-Muslim and nationalist policies. Meanwhile, a recent research note from Societe Generale points out that the experience of other emerging countries suggests that stockmarkets tend to do badly after the election of political reformers, due to the short-term costs involved.

Is the world getting safer?

It may seem to go against the grain, but many experts believe the world has become safer, at least over the last 30 years. Canadian research centre the Human Security Report Project notes that the number of conflicts between states has fallen from over 50 in the 1990s, to a low of 32 in 2012.

High-intensity conflicts have fallen from 16 in 1986 to six in 2011. Similarly, the number of deaths from such conflicts fell from around 80,000 in 2000 to under 20,000 in 2011. They argue that the most convincing explanation is rising national incomes, which are “the strongest determinants of reduced risks of civil wars”.