Philippines Analytical Brief: Economic Ties the Focus of Duterte's Visit to Beijing

Economic Ties the Focus of Duterte's Visit to Beijing

During his first official visit to Beijing October 18-21, President Rodrigo Duterte announced a “separation” from the United States. However, Duterte's rhetoric in China about “separation” is less about severing ties with the United States and more about normalizing economic relations with China.  However, while the Philippines may benefit from increased Chinese participation in some sectors, a surge of Chinese investment in the infrastructure sector could also crowd out other sources of funds and limit the effectiveness of institutions intended to strengthen the role of the private sector in the Philippines’ development.

Trade and investment relations between the Philippines and China had deteriorated since a 2012 standoff between Philippine and Chinese vessels at the disputed Scarborough Shoal in the South China Sea (also called the West Philippine Sea).  The standoff ended with Chinese vessels restricting Filipino fishermen from accessing the shoal.  In response, in 2013 the previous Philippine administration of President Benigno Aquino III challenged China’s disputed South China Sea territorial claims in the Permanent Court of Arbitration (PCA) at The Hague.  This past July, the PCA ruled in favor of the Philippines, finding that China’s claims had no legal or historical basis under the U.N. Convention on the Law of the Sea. 

Though the South China Sea dispute was brought up during Duterte’s visit to Beijing, the story that the new administration in Manila hoped to highlight was the bevy of trade and investment deals that the two countries signed.  On the South China Sea issue, President Duterte and President Xi Jinping of China agreed to resume direct talks on disputed areas in the sea—a move that could have ramifications for other ASEAN members’ disputes with China in the South China Sea.  Rather than dwell on the implications of this nebulous agreement to resume direct talks, the Philippine delegation instead aimed to emphasize the 13 agreements the Philippine and Chinese governments signed covering various economic sectors.  In addition to USD9 billion in soft loans, which includes a USD3 billion line of credit from the Bank of China, trade and investment deals worth USD15 billion were also signed as part of the trip.  The deals, which cover agriculture-, energy-, ICT-, and infrastructure-related projects, include:

• Memorandum of understanding (MOU) between the Bases Conversion and Development Authority (BCDA) and China Harbour Engineering Company Limited to establish the Manila-Clark Railway, a cargo train connecting Subic Seaport and Clark Airport

• MOU between BCDA and China Road and Bridge Corporation on Fort Bonifacio-Ninoy Aquino International Airport (NAIA) Bus Rapid Transit (BRT) System

• MOU on BCDA-China Fortune Land Real Estate project

• Safe and smart city projects for BCDA by BCDA and Huawei Technologies

• Transportation and logistics infrastructure at Sangley Point by Cavitex Holdings, International Container Terminal Services Inc. and China Harbour Engineering

• Joint venture agreement of Jimei Group of China and Expedition Construction Corp. for infrastructure projects

• North Negros biomass and South Negros biomass project by North Negros Biopower and Wuxi Huaguang Electric Power Engineering

• Globe Telecom projects to improve network quality and capacity

• Jin Jiang hotel room capacity expansion from 1,000 to 2,000 by Double Dragon Properties and Hotel of Asia Inc.

• MOU between Columbus Capitana and China CAMCE Engineering Co., Ltd. involving joint projects in renewable energy, major infrastructure and real estate (USD100 million)

• Strategic Cooperation Agreement between Mannage Resources Tradign Corp and SIIC Shanghai International Trade Hongkong to infuse USD200 million to build a Generation Steel Mill Plant

• MOU between Global Ferronickel and Baiyin International Investment Ltd to invest about USD500-700 million to construct a steel plant

• MOU between Trademaster Resources Corp, Servequest Inc., and TBEA Xinjing Sunoasis Co., Ltd to jointly pursue development and construction of renewable energy products in various locations (USD97 million)

• MOU between Mega Harbour Port and Development, Inc and China Harbour Engineering Co., Ltd,involving Davao Coastline and Port Development Project (USD780 million)

• MOU between R-II Builders and China Harbour Engineering Co., Ltd involving Manila Harbour Center Reclamation Project (USD148 million)

• MOU between Mega Harbour Port and Development Inc, and CCCC Dredging Co.involving Cebu International and Bulk Terminal Project (USD328 million)

• MOU between MVP Global Infrastructure and Suli Group to invest USD3 billion to build cabling manufacturing facilities

• MOU between Philippine State Group of Companies and Yangtse Motor Group and Minmetals International (H.K) Ltd. to develop Manila EDSA Bus Transportation program and for other places with initial investment of USD100 million

• Cooperation agreement between SL Agritech and Jiangsu Hongqi Seed Co., Ltd to invest USD160 million to produce hybrid rice enough to plant in 2 million hectares of rice fields

• Letter of Intent between Zhuhai Granton Bus and Coach Company to invest USD300 million to build a bus manufacturing facility

• MOU between AVLB Asia Pacific Conglomerate Inc. and Shanghai Xinwo Agriculture Development Co., Ltd to invest USD100 million in Banana Plantation

• Memorandum of agreement between Greenergy Developemtn Corp and Powerchina Guizhou Engineering Corp., worth USD1 billion on development of 300MW Pulangi-5 Hydro Project

• MOU between Zonar Construct and SinoHydro on Pasig River, Marikina River, Manggahan Floodway Bridges Construction Project (USD600 million)

• Ambal Simuan Sub-River Basin of the Mindanao River Basin Flood Control Project (One White Beach Land Development Corporation and Sino Hydro, worth USD325 million)

• Nationwide Island Provinces Link Bridges for Sustainable Development (Zonarsystems Solutions Inc and Powerchina Sinohydro, worth USD800 million)

• MOU between MVP Global Infrastructure and China Railway Engineering Corp for a railway study project worth USD2.5 billion  
• China also announced that it would lift import restrictions on 27 Philippine fruit growers and a travel warning that had advised Chinese tourist to avoid the Philippines.

China-Philippines Economic Relations Prior to Duterte's Visit

Despite ranking as one of the Philippines’ top trading partners, there are several key metrics, most notably foreign direct investment (FDI), where the Philippines has lagged behind its regional peers in its economic relations with China.  A brief overview of Chinese-Philippine economic relations shows the degree to which there is room for growth.  China is the Philippines’ second-largest trading partner, making up 13.6 percent of the country’s trade in 2015.  By comparison, the United States was the country’s third largest trading partner, trailing China by nearly one percentage point at 12.7 percent, while Japan was its top trading partner.  China accounted for 10.9 percent of Philippine exports, while Chinese imports made up 16.2 percent of all documented imports into the Philippines.  The latter made China the leading source of shipments into the Philippines, especially if smuggled goods, which are not factored into the official figures, are considered. 

Even with these healthy trade figures, other aspects of the bilateral economic relationship lag behind the Philippines’ Southeast Asian peers.  Chinese FDI into the Philippines was almost negligible at 0.01 percent of all FDI coming into the country in 2015.  While the Philippines invested around USD75 million in China as of 2012, Chinese FDI has only amounted to USD570,000 as of 2015.  Overall, the Philippines received roughly only 2 percent of all Chinese investment in ASEAN in 2014.  While economic relations between Manila and Beijing had deteriorated since the 2012 Scarborough Shoal standoff, the Philippines already received the lowest amount of Chinese FDI in the region.  According to the Institute of Southeast Asian Studies, between 2009-2012 the Philippines received on USD1 million in FDI.  The countries that received the second- and third-lowest FDI were Malaysia and Laos, which received USD322 million and USD856 million, respectively.

Warmer Ties with China a Means to Increased Funding for Infrastructure Development 

Taking this trend of low Chinese FDI into the Philippines into account, Duterte sees improving economic relations with Beijing as a way to open the spigot for increased funding from both China and the China-led Asian Infrastructure Investment Bank (AIIB), with the aim of ushering in the “Golden Age of Infrastructure” that he has promised during his term.  The Philippines joined the AIIB in December 2015, under then-President Benigno Aquino III, and the new administration in Manila is betting that warming relations with Beijing will translate into more project funding from the bank, in which China holds a 30 percent stake and 26 percent of voting rights.  The increased FDI and AIIB funds would help him fulfill the infrastructure development pledges he made during the campaign, pledges that he has also incorporated into his 10-point economic plan, such as the pledge to spend PHP7 trillion on infrastructure during his six-year term. 

Quick progress on major infrastructure projects would also give the Duterte administration some results to trumpet as evidence of the efficacy of its more open approach to China, allowing it to contrast the new approach with that of the Aquino administration, which relied heavily on the public-private partnership (PPP) model for infrastructure development.  Duterte and his economic team are not completely abandoning the PPP approach.  In mid-September, Duterte approved nine projects collectively worth PHP171 billion (USD3.5 billion).  Among the approved projects were upgrades to Ninoy Aquino International Airport and plans for a bus rapid transit system in Manila.  In addition, on October 23 the PPP Center of the Philippines launched a PHP5.3 million (USD110,000) Development of Foreign Investment Framework Project that aims to increase foreign investment in infrastructure development.  The project is funded by a grant from the UK, and it will focus on how investors can best structure their investments to allow them to more easily participate in infrastructure projects.  However, it is not expected to be completed until at least March 2017, and it is unclear if the new framework will help speed up the PPP process.  According to the PPP Center’s own statistics, by the end of the Aquino administration there were 53 PPP projects in the pipeline, 12 of which had been awarded.  Overall, only three PPP projects were completed before Aquino left office.  With this in mind, the Duterte administration sees re-engaging China as a way to widen its source of funds for infrastructure development, while also providing a means to see faster results in some major infrastructure projects.

Increased Chinese Investment in Infrastructure Could Crowd out Foreign Private Investors and Limit Job Creation

While the new administration in Manila is attempting to make the PPP process more amenable to foreign investors and plans to continue projects initiated under the previous administration, one potential consequence of warmer relations with China is a move towards a state-centric investment approach, which could see the country’s PPP program atrophy over Duterte’s term.  Amid warmer relations with China, the relative ease of obtaining the necessary funds for infrastructure development could undercut and crowd out private bids for infrastructure projects.  It could also scupper plans to simultaneously promote the Philippines’ PPP program and increase the role of capital markets in financing major PPP infrastructure projects by listing them on the Philippine Stock Exchange.  According to BMI Research, a unit of Fitch Ratings, an increased reliance on Chinese infrastructure investment is likely to lead to a decrease in the number of projects open to private bidders.  Two potential consequence of such a scenario would be an increase in demand for government budgets to take up the slack in terms infrastructure funding, possibly opening the door for more deals with Chinese firms.  The effect of such a shift to a more state-centric investment approach would very likely have a negative impact on other foreign firms looking to expand into the Philippine market at a time of increased infrastructure development. In addition, the desired employment generating impact of infrastructure development is likely to be smaller than expected given that Chinese government-funded infrastructure projects tend to involve Chinese state-owned enterprise contractors who have a track record of employing thousands of Chinese workers instead of local workers.