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Vietnam riots: How bad will it get for corporate sentiment?

Smoke and flames billow from a factory window in Binh Duong on May 14, 2014, as anti-China protesters set more than a dozen factories on fire in Vietnam.
VNExpress | AFP | Getty Images
Smoke and flames billow from a factory window in Binh Duong on May 14, 2014, as anti-China protesters set more than a dozen factories on fire in Vietnam.

As anti-China riots in Southern Vietnam continue to escalate, the violence is posing a risk to the country's appeal as a foreign investment destination.

According to Reuters' reports, over 20 people are reported to have been killed and scores of foreign factories have been burnt to the ground in the worst breakdown in Sino-Vietnamese relations since a brief border war in 1979.

Thousands of protesters are rampaging through the industrial zones of southern Vietnam in reaction to the Chinese oil drilling in a part of the South China Sea claimed by Vietnam. Many foreign factories have halted production, Reuters reported, worrying investors who are concerned about the impact on profits.

Read MoreVietnam mobs set fire to Chinese factories

Catherine Mellor, director at the U.S. Chamber of Commerce, told CNBC she hoped the violence would come to end soon so Vietnam could restore its reputation as an attractive foreign investment location.

"There is lot of competitiveness for foreign direct investment in Asia and particularly in ASEAN and so for a country like Vietnam it's incredibly important for them to not only be seen to all foreign markets as a place for foreign investment [but also] as a good participant in the Trans Pacific Partnership (TPP)," she said.

Companies that have been hit include Hong Kong-based shoemaker Kingmaker Footwear Holdings and fabric maker Texhong Textile Group, where shares have fallen around 4 percent and 7 percent respectively on Thursday.

Read MoreChina tensions may have made this market a bargain

Meanwhile Fittec International Group, a maker of printed circuit boards and electronic components, tumbled nearly 16 percent after it said its factory in Vietnam had been torched and looted.

Other Hong Kong listed companies with Vietnam facilities also saw sharp share price drops. Vietnam Manufacturing & Export Processing Holdings fell over 4 percent.

Hong Kong based global exporter Li & Fung, said on Thursday its factory facilities in the troubled region, had been damaged and said the disruption would be mainly impact its U.S. clients. Its share price bucked the trend, however, and traded up around 0.4 percent on Thursday.

"While the riots will certainly damage Vietnam's reputation as a politically stable country for foreign investment, these riots are targeted at Chinese-owned facilities, and are not expected to affect investments from other countries such as the E.U. or U.S.," said Rajiv Biswas, chief Asia economist at IHS Global Insight.

"Vietnam's economy is currently recovering well from several years of macroeconomic difficulties, and if this current dispute with China can be quickly resolved, it is unlikely to derail the momentum of recovery. However if the dispute lingers on, it could have a negative impact on Chinese and Taiwanese investment flows to Vietnam and slow down Vietnam's recovery," he added.

Taiwanese, Singaporean and Japanese companies were also targeted, as protesters attacked factories with Chinese characters on their signs or logos, mistaking them for Chinese firms.

A huge steel plant in the Ha Tinh province owned by Formosa Plastics Group - Taiwan's biggest investor in Vietnam - was reported by Reuters to have been set ablaze on Wednesday. One Chinese worker died and 90 others were injured in the attack.

And Taiwanese shoe maker Yue Yuen Industrial holdings, which makes footwear for companies like Nike and Adidas, saw its stock fall 5 percent on Wednesday and extend losses by 0. 4 percent on Thursday.

Read MoreThe entrepreneur who bought McDonald's to Vietnam

The tensions flared up earlier this month after China moved its Haiyang Shiyou 981 oil rig 120 nautical miles off the coast of Vietnam. The area is near the Paracel Islands, over which China and Vietnam have contesting claims.

Vietnam's government protested and demanded an immediate pull-out, leading to clashes between ships from both countries around the rig.

Protesters began gathering in Thuan An town, in Binh Duong - Vietnam's industrial heartland, on Monday, the BBC reported.

Five Vietnamese workers and 16 other people described as Chinese died during anti-China rioting on Wednesday night, according to a doctor at a hospital in the central Vietnamese province of Ha Tinh, Reuters reported.

Cambodia has reported that more than 600 Chinese nationals escaping across the border from Vietnam.

Read MoreBatten down the hatches, there's trouble in the China Sea

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