under construction sign

Heightening China-PH economic relations: friends with benefits?

November 19, 2018

by IBON Media

by Rosario Bella Guzman

There is a growing concern about the phenomenal increase of Chinese capital flowing into the Philippine economy. China has recently overtaken the US in terms of foreign direct investment (FDI) inflows and trade. In the first semester of 2018, FDI from China amounted to US$175 million as compared with Japan’s US$154 million and US’s US$84 million. From January to September, Philippine exports to China (including Hong Kong) amounted to US$13.9 billion compared with exports to the US worth US$7.8 billion.

Pres. Duterte has also surpassed all previous presidents in terms of his closeness to Beijing and is nearly there in terms of attracting Chinese capital. He has already made three official visits to China, bringing with him a large entourage of businessmen and government officials, and making him the most frequent traveler to China among all Philippine presidents. The Philippine government seeks China’s support for at least Php738 billion worth of infrastructure projects accounting for almost half of the Php1.5 trillion flagship projects under the Duterte administration’s Build, Build, Build. To date, it has already identified Php392 billion worth of projects for China’s consideration.

China’s portfolio in the Philippines includes: the PNR South Long Haul, Mindanao Railway, Subic-Clark Railway, Chico River Pump Irrigation Project, New Centennial Water Source-Kaliwa Dam, Ilocos Norte Irrigation, Pasig-Marikina River bridges, Davao-Samal bridge, Davao River bridges, Davao City Expressway, Panay-Guimaras-Negros bridge, Camarines Sur Expressway, Agus-Pulangui Hydroelectric Power, and the Ambay-Simuai Rio Grande de Mindanao flood control project. China is also building the Philippine National Police, Bureau of Jail Management and Penology and Bureau of Fire Protection command centers in Metro Manila and Davao.

Pivot from the US to China?

Some quarters wonder if the Philippines is already slipping from the grip of the United States and falling into China’s arms. It must be emphasized, however, that the US and Japan remain dominant in the Philippine economy. They hold the largest FDI stock in the country, which is an important indicator of the extent to which foreign capital exploits Filipino labor, natural resources and markets, and also points to how much of the country’s economic surplus is repatriated abroad. Also, in terms of portfolio investment, the US accounts for 43% of inward hot money while mainland China accounts for only 6%, and Hong Kong, 3 percent. The US can wield these flows to destabilize domestic financial markets and even the peso exchange rate.

Trade-wise, export and import data can be misleading. These do not necessarily reflect trade by Filipino or Chinese enterprises but by US, Japanese, European, Korean, Taiwanese or other firms merely located in the Philippines or China. The US, Japan and Europe in particular are major players in transnational corporation (TNC)-dominated global value chains spread across Factory Asia.

In terms of official development assistance (ODA), although China’s commitment to the Philippines ballooned from only US$1.5 million in 2016 to US$63.5 million in 2017, this is still miniscule compared to Japan’s US$5.3 billion. The US Partnership for Growth is also much more far-reaching. It coordinates efforts by the United States Agency for International Development (USAID), US State Department, Millennium Challenge Corporation (MCC) and other US agencies, involves the World Bank, International Monetary Fund (IMF) and various United Nations (UN) bodies, and incorporates economic policy dictates. This apart from the considerable military and security aid given by the US.

State aid on the outside, corporate-driven on the inside

At any rate, alarm bells are ringing as regards the increasing role of China in the Philippine economy. This is probably stemming from the very nature of Chinese capital. The continued dominance of China’s state-owned enterprises blurs the line between FDI and ODA where both become linked to Chinese foreign policy. Many of these private investments and corporations are also actually owned and controlled by the Chinese bureaucratic elite.

Thus, many large loans and investment have Beijing transacting directly with the Philippine government. This increases its proximity to the Philippine government’s coffers and allows it to demand the Duterte government not only to shell out counterpart funds but also to faithfully – or by all means – abide by its loan obligations.

China as a rising imperialist power is interested in mineral and energy resources, cheap labor — or for the moment – the mobility of its own cheap labor, a market for consumer products, but most of all, a market for its huge surplus infrastructure capacity (in construction, transport, communications). As with other capitalist powers China needs to recycle its surplus capital for profit whether in the form of commercial loans, ODA, or FDI. China actively seeks to open up and make other countries subservient in pursuit of its imperialist objectives and ambitions.

Issues with Chinese capital

Concerns have been raised about the Duterte administration’s avowed reliance on Chinese capital. One concern is how China demands that the projects they fund exclusively use Chinese contractors. This has raised major worries regarding the eligibility and unscrupulous business practices of Chinese firms, some of which have been revealed as on the debarment list of the World Bank. It must be pointed out, however, that Japan and the US have been doing that same sort of tied aid in the Philippines for the longest time. Caution must be exercised in overly focusing on this analysis as there can also be a concerted propaganda effort by the dominant neoliberals to discredit Chinese firms.

Another concern is corruption. Deals with China lack transparency, while the Duterte administration is overtly favoring Chinese firms and investors, local oligarchs and their partners. The Duterte administration earlier came up with special guidelines for Chinese loans and investment presumably to ensure that these would be beneficial to the Philippines and to enhance transparency. But it has only accelerated the process of China’s availment even without clear feasibility studies and cost-benefit analysis.

China’s lack of environmental and labor standards, including its use of its own laborers in the borrowing countries, is also a concern. Indeed, this is worrisome, but it is not as though the US has not led the plunder of Philippine resources and violations or circumvention of labor rights. EU investment, on the other hand, is obliged to conform with human rights standards only as a result of activists’ struggles in the EU and recipient countries. It just so happens that the Chinese government is not accountable to national or international social norms.

Aid or burden?

The core of worries is the growing indebtedness of the Philippines due to the Duterte government’s availment of China’s ODA. But even this concern should be qualified carefully.

Much of what is passed off as Chinese ODA are actually commercial loans, unlike Japanese ODA which are concessional loans coming from the tradition of war repayments. China charges 2-3% interest while Japan offers 0.25-0.75% concessional rate. The Philippine government may also be forced to collateralize state assets as illustrated by the case of Sri Lanka which had been forced to relinquish its strategically located Port Hambantota on a 99-year lease to Chinese firms because it could no longer pay its debt.

Government’s outstanding government debt as of August is Php7.1 trillion or 43% of the gross domestic product (GDP). Public and private foreign debt stands at US$72.2 billion or 22.5% of the GDP. This is indeed worrisome, but commercial credit still accounts for the bulk of foreign debt, while bilateral debt is mostly from Japan, multilateral agencies such as the World Bank and ADB, and the US.

What is driving the Duterte administration to deep indebtedness is its own Build, Build, Build program and the use of hybrid public-private partnership (PPP) absent a strong industrial and economic capacity and foundation. The economy does not have the absorptive capacity, neither does the government. Its reliance on importation is the one that is driving the country to an unprecedented borrowing rate and weaker currency. Due to its shift to hybrid PPP, the Duterte government from the beginning knew that it would need easy, fast and huge funding, and China has the capacity to provide this.

What is worrisome is China’s ‘debtbook diplomacy’ – the terms of reference of the investment deals will drive the country to renewed debt bondage and subservience. These step on the country’s sovereignty that the Duterte government is waiving. The current administration is surrendering sovereign immunity in connection with any loan obligations-related arbitration, is committing to follow China’s laws. It also agrees to subject disputes to the decision of an international arbitration tribunal, as illustrated in the loan agreement for the Chico River Irrigation Pump Project. Problematically, such surrender of sovereignty now becomes the ‘gold standard’ for succeeding loan and investment deals.

Still a willing accomplice

The Duterte government has, from the start, softened its stand against China. China has been aggressively pushing its Belt Road Initiative (BRI), which aims to enhance connectivity between Asia, Europe, and Africa. BRI is composed of the Silk Road Economic Belt (SREB) and the 21st Century Maritime Silk Road (MSR). The start of BRI in 2013 saw a large number of bilateral deals signed between China and participating countries.

The Philippines is not an official BRI participant. But Pres. Duterte attended the BRI Summit, as the administration appears to be particularly interested in the MSR which offers vast infrastructure funding opportunities.

The MSR deals with port network development that will connect Chinese ports to Europe and the southern Pacific Ocean. However, it will run across contested territorial waters.

This explains the Duterte government’s alliance with China and its softening on the country’s territorial claims. It explains as well the current administration’s subservience despite China’s abuses in Philippine territory.