President Rodrigo Duterte's needs Chinese financing to build the US$4 billion Mindanao Railway. Photo: Reuters/Wu Hong
President Rodrigo Duterte's needs Chinese financing to build the US$4 billion Mindanao Railway. Photo: Reuters/Wu Hong

Last October Philippine President Rodrigo Duterte secured more than US$24 billion worth of investment and loan commitments during a visit to China, a capital promise that shifted his policy closer to Beijing and further from Washington. The Chinese capital infusion promised to create two million new jobs over the next five years and modernize much of the country’s notoriously creaky infrastructure.   

Six months later, there is little indication that largesse, broken down to US$15 billion in investments and around US$9 billion in nearly interest-free concessional loans, has been disbursed or lifted the economy. Nor has Duterte’s bet that closer economic ties would mitigate bilateral strategic disputes, including in the South China Sea, paid off as China ramps up activities on disputed features close to the Philippine coastline.   

Duterte’s top economic lieutenants stand by the shift towards more economic engagement with Beijing. Philippine Finance Secretary Carlos Dominguez told Asia Times that recent visits to Beijing and reciprocal Chinese commitments to finance railroads and ports worth US$3.5 billion shows engagement is working, particularly after a period of confrontation under the previous Benigno Aquino regime.

In mid-March, China’s Vice Premier Wang Yang and International Trade Representative Fu Ziying visited Duterte in his home town of Davao City for a symbolic four-day visit where the two sides signed a six-year development program, including agreements to boost Philippine agriculture exports to China.

Benevolent Patron: China’s Vice Premier Wang Yang (C) in front of a Mindanao Railway Project map in Davao City on March 18, 2017. The proposed infrastructure will pass through Philippine leader Rodrigo Duterte’s hometown. Photo: AFP/Manman Dejeto

A week earlier, Chinese Minister of Commerce Zhong Shang made a three-day visit to restore the Philippines-China Joint Commission on Economic and Trade Cooperation, a trade body which was shuttered in 2011 over South China Sea disputes. He said the commission’s reactivation should “serve as a quick follow through from the economic agreements signed.”

Dominguez also emphasized that there are several private sector deals underway, noting in particular the US$750 million venture between the local Globe Telecom and China’s Huawei Technologies to upgrade the country’s internet infrastructure.

He claims such a deal would likely have not gone through if bilateral relations were as tense as they were under the Aquino administration. (Globe and Huawai have done business together since 2012, including for upgrading cellular and internet service infrastructure, during the Aquino government.)

Pro-China: Philippine Finance Secretary Carlos Dominguez listens to reporters questions after meeting China’s Commerce Minister Gao Hucheng in Beijing, China, January 23, 2017. Photo: Reuters/Damir Sagolj

The local business community, sanctioned by China in certain sectors under Aquino, has so far welcomed the turn towards more commercial engagement.

George Barcelon, chairman of the Philippine Chamber of Commerce and Industry (PCCI), said China has aggressively promoted its trade-geared One Belt, One Road infrastructure Initiative in the Association of Southeast Asian Nations since as early as 2013.

“But the Philippines has been practically left out on this due to the territorial dispute on the South China Sea, which both countries claim,” Barcelon said. “While the previous Aquino administration is more legalistic, the current one is more pragmatic and desires to settle differences bilaterally to establish more trade that will benefit the country.”

China skeptic: Ex-Philippine President Benigno Aquino maintained testy relations with Beijing over territorial disputes: Photo: Reuters/Romeo Ranoco 

While Duterte’s administration has yet to show proven gains from the shift to China in terms of jobs and actual implemented projects, for businessmen like Barcelon it is important that the private sector now has the government’s blessing to do deals with Chinese counterparts. The Philippine private sector, he said, has already signed eight or nine major memoranda of understandings with Chinese businesses since Duterte’s election.

Sergio Ortiz-Luis Jr, president of Philexport, an umbrella organization of local exporters, and vice chair of the Export Development Council, says that the deals with China are timely given uncertainty in the global economy and rising protectionist sentiments in the West, namely the US. He said that while China’s growth has slowed somewhat, it is still impressive and will continue to lead the region’s economy.

At the same time, opposition politicians and independent analysts suspect that the promise of more Chinese trade and investment is tied to possible Philippine concessions on their maritime disputes in the South China Sea. Those suspicions have gained wider resonance as China moves more assertively on features near the Philippine coast, including recent construction activity on the contested Scarborough Shoal.

Chinese commerce minister Gao Hucheng cancelled a visit to the Philippines scheduled for February 23, which would have cemented billions of dollars of promised investments, after then Philippine Foreign Secretary Perfecto Yasay said two days earlier that China’s continued militarization of the disputed islands was of “grave concern.”

Yasay’s appointment as the country’s top diplomat was soon thereafter rejected by the Commission on Appointments and then withdrawn by Duterte.

Sidelined: Ex-Philippine Foreign Secretary Perfecto Yasay was knocked from office soon after expressing deep concern about China’s actions in the South China Sea. Photo: Reuters/Romeo Ranoco

Earlier this month, defense chief Delfin Lorenzana reported that Chinese ships were spotted plying the Benham Rise, which is east of the Philippines and far beyond China’s notorious 9-dash-line map, which it invokes as historic claim to the western sea part of the Philippines. Lorenzana said he had received reports that the Chinese ships may have been surveilling for places to position their submarines in the Pacific.

Duterte has vacillated between tough and conciliatory rhetoric towards China, but has generally downplayed Beijing’s moves in the disputed waters. He said at a March 13 press conference that China had committed “no incursion” on Philippine territory because he has a “deal” in place with Beijing, without elaborating. “I even invited them to the shores of the Philippines for a visit,” Duterte told reporters.

Philippines President Rodrigo Duterte (L) and Chinese President Xi Jinping. Photo: Reuters

While Chinese investments have not yet hit the ground, Chinese tourists have. Tourist numbers surged in January to 631,639, the highest ever recorded in a single month, driven by fast rising Chinese arrivals. Tourism accounted for around 10.6% of GDP in 2015. 

While South Korea still accounts for the highest number of tourists, followed by the US, visitors from third-ranked China soared 76.5% to 85,948 year on year in January. For 2016, Chinese visitors grew by 37.6% to 675,663 from 490,841 in 2015. China ranks seventh overall in total tourist spending but does not place in the top ten in per capita spending.

With investment slowing, job growth stagnant and the currency slipping, Duterte needs to show soon tangible, positive results from his engagement with China.

Despite Duterte’s overtures and China’s promises, there are indications that local investors are putting off expansion plans given the volatility of the political situation under his unpredictable rule. Business confidence has declined significantly from 48.7% in June last year, the month before Duterte’s election, to 39.4% at present, the central bank recently reported.

The Philippine Statistics Authority said this month that foreign investments for 2016 fell by 10.7% to P219 billion (US$4.36 billion) from P245 billion (US$4.89 billion) in 2015, with most of the declines occurring in the second half of the year after Duterte took office. Nonetheless, the Philippine economy expanded 7% last year, one of the fastest rates in Asia.

Congressman Joey Salceda, a Duterte ally, believes that China will soon start to cover the shortfall in investment from other traditional investors, including from the US and European Union, and sustain fast growth during the remaining five years of Duterte’s administration.

Infrastructure gap: China has pledged to help finance modern railways, ports and other badly needed infrastructure in the Philippines. Photo: Reuters/Damir Sagolj 

China’s promised funds, however, have not stabilized the local currency, the peso, one of the region’s worst performers this year. The unit recently dipped to its lowest level in a decade at 50.4 to the US greenback, while unemployment is at its highest level in two years at 25.1%, according to Social Weather Stations, a local pollster. Inflation also rose to 3.3%, its highest level in over two years, in February.

While Dominguez has publicly praised China’s commitments, he has warned local businessmen in private that they must be “selective” in their China dealings, according to PCCI chairman Barcelon. With investment slowing, job growth stagnant and the currency slipping, Duterte needs to show soon tangible, positive results from his engagement with China.

Dominguez reportedly reminded local business representatives to “only deal with legitimate companies to avoid corruption issues” – a veiled reference to the US$329 million ZTE-National Broadband Network anomalous deal in 2007 that nearly toppled Gloria Macapagal-Arroyo’s government.

Sovereign issues: President Rodrigo Duterte will head to China in April to reaffirm Beijing’s earlier investment and loan pledg. Photo: Reuters/Thomas Peter

Dominguez has also acknowledged there is a need to implement regulatory reforms, particularly on taxes but also to lift foreign ownership limits in key business sectors which are currently constitutionally capped at 60%. He has suggested such legal changes are necessary to sustain and institutionalize Chinese investment in the country beyond Duterte’s administration.

In April, Duterte will travel hat-in-hand again to Beijing to follow up on previous trade and investment pledges. With investment slowing, job growth stagnant and the currency slipping, Duterte needs to show soon tangible, positive results from his engagement with China.

If the promised infusion of Chinese capital doesn’t come soon, and bilateral tensions continue mount off-shore, Duterte risks losing the business and public support he has so far received for his pro-China gambit.

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