China, the biggest regional economic power and the world's number two economy, has become more assertive about its rights in the region, alarming its neighbors.
And the latest flare up in tensions comes just days after U.S. President Barack Obama visited Asia to reassure allies such as Japan and the Philippines.
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It also keeps geopolitical risk at the forefront for global markets just when sentiment received a boost on Wednesday after Russian President Vladimir Putin urged pro-Moscow separatists in Ukraine to postpone a vote on secession.
"What is interesting is that this theme of geopolitical tensions, which we are seeing globally and Ukraine is a good example of that, is something markets are aware of," said Hamish Pepper, forex strategist for Asia at Barclays. "To the extent that we do see geopolitical tensions rise for whatever reason that is a catalyst for risk aversion."
Still, analysts said the impact on developed markets from geopolitical tensions Asia was probably likely to be limited for now.
"Traders and markets will always keep an eye on the South China Seas but developed markets realize the chances of something significant happening are low for now," said Chris Weston, chief market strategist at IG in Melbourne.
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While Vietnam stocks tumbled on Thursday, the benchmark Shanghai Composite gained 1 percent as investors focused on stronger-than-expected China trade data.