Tag Archives: Philippines

China’s economic capital in the Philippines: Problems and prospects

Over the last two decades the improved bilateral relations between China and the Philippines led to the increased inflows of Chinese economic capital—as foreign direct investment (FDI) and aid—in the Philippines. I argue that China’s foreign aid, if managed correctly will immensely benefit the Philippines.

During the Arroyo administration (2001-2010), the number of Chinese aid projects ranging from commercial and concessional loans to grants increased exponentially. Some of these projects were ultimately cancelled such as the ZTE/North Rail projects, and CHED Cyber education projects while others like the Banaoang Pump Irrigation Project, General Santos Fishing Port Complex Expansion, and Agno River Integrated Irrigation project were successful yet publicly invisible. However, after the Aquino administration (2010-2016) mounted a legal challenge to China over South China Sea claims, Beijing halted new loans and aid projects.

Today Philippine President Rodrigo Duterte is pursuing a new approach with an eye on China’s Belt and Road Initiative (BRI), which aims to centralize investment and aid inflows at crucial geographies and sectors. During Duterte’s 2016 visit to Beijing, he received $24 billion in investment pledges to complement the administration’s massive $183 billion five-year Build Build Build (BBB).

I began my field research in the Philippines in 2014, focusing on Chinese foreign investments in the mining sector. Afterwards, I moved to studying Chinese foreign investment and aid in the Philippines more broadly. As such, I’ve been conducting field research on China’s $24 billion commitment to the Duterte administration and made the following preliminary findings.

First, pundits with alarmist tendencies populate major media and popularized a “debt trap” without ample empirics. There is no doubt that Chinese aid generated debt trap crises that have plagued high risk countries. In a debt trap, a country loses its output to loan payments, costing the country an opportunity to expand its output. Overwhelmed by spiraling debt service and low growth, the host country eventually loses control of collateral assets to the lender. Using credit risk ratings and the International Monetary Fund’s debt sustainability analysis, the Center for Global Development (CGD) finds that 23 out of 56 countries show reasonable levels of risk to China’s BRI.

However, the risk of a debt trap appears to be low in the Philippines largely due to its BBB and BA1 credit ratings. Indeed, the World Bank argues that debt traps are avoided if projects generate output that outpaces debt. There is a strong domestic demand for infrastructures due to internal activities, which will surely generate a multiplier effect for the Philippine economy. A common criticism is that the Philippines could acquire Japanese Infrastructure Construction Agency (JICA) loans at less than one percent.

However, JICA or ADB loans comprise already of more than half of present loans since October 2016 while there are only 3 projects to be funded by China thus far. Additionally, Japan cannot possibly provide loans to all infrastructure projects due to borrowing limitations, expediency, and environmental requirements. While there are some concerns around Chinese loans, these must be assessed against the opportunity cost of not funding the project.

Underpinned by continued strong macroeconomic fundamentals due to structural reforms begun under Aquino, Duterte’s economic team is well-positioned to balance growth and the debt to GDP ratio. The present list of projects does not present concerns of a debt trap. One such project is the Chico River Pump Irrigation Project in Northern Luzon for which in April 2018 the Duterte administration signed a $62 million loan agreement with 2 percent annual interest maturing in 20 years and a 7-year grace period. Two China grants, which are turnkey projects built by Chinese firms and labor for free or, have been signed for two Philippine bridges valued at $73 million. The Kaliwa Dam Project has passed bidding, with stakeholders and Chinese developers currently in consultation. Other projects in the pipeline are under study, including a South PNR Project, the Philippine SAFE, and 12 other bridges.

Other projects further down the line include the renovation of the Clark Airport and the second phase of the Mindanao Rail project. Indeed, the loans of Chico and Kaliwa dam are manageable while the bridge projects are for free. The two train projects and the airport are the riskiest in the list, presenting the strongest case for the debt trap, but these have not even begun yet. However, these risks can be minimized if these projects generate enough output, which could be used to pay for the borrowed loans. Some degree of inflation and deficit spending will increase due to increased import spending. One crucial concern is that the Philippines’ growth or output depends on moderate inflation and fiscal deficits. The “debt to GDP ratio” tends to shrink when inflation goes awry, which could lead to a deficit increase and the conditions of a debt trap. Additionally, aid projects from future commitments that would not generate sufficient output should be a cause of concern. These are issues that the economic managers of Philippine currency and infrastructure projects need to watch.

Second, host state factors matter to the completion or cancellation of China’s aid projects. For China, a Palgrave Communications study that finds a 10:1 ratio exists between pledges and actualization of investments. The ratio can be explained by various sending and host state factors, which means that the actualization of the entire pledged amount is highly unlikely. While Chinese FDI failed to reach the $15 billion pledged, between June 2016 and April 2018, Chinese FDI in the Philippines reached US$1.02 billion, amounting to nearly 85 per cent of the total amount registered during the Aquino administration. In other words, media and pundit outrage at the low amounts of Chinese actualized FDI should be taken with a grain of salt given the expected rate of cancellation from foreign commitments. Nonetheless, China should be criticized for the lack of transparency of aid and investment projects, and the Duterte government should be reprimanded for marketing pledged rather than actualized amounts.

On all Chinese and non-Chinese projects in the Philippines, elite competition, regulatory red tape, and local government decisions largely account for investment cancellation and delays. Currently, these host state factors are shaping the outcome of China’s $24 billion pledged. For instance, a hydropower project by Power China Guizhou and Philippines Greenergy Development Corp encountered trouble acquiring funds because of the uncertainty regarding the recently signed Bangsamoro Basic Law (BBL), a law which grants autonomy to the Muslim areas of the Southern Philippines. Most of the major investment projects in Mindanao province have been delayed because of this new terrain as investors are trying to figure out the economic implications of the new law. In another, a deal between Global Ferronickel, the third-largest nickel ore producer in the Philippines, with Baiyin Nonferrous Group, a Chinese copper supplier that was put on hold due to a moratorium on new mining operations, which made investment in mining operations fruitless.

In other cases, the completion of Chinese projects also depends on the preferences and political sway of local elites, which often matter to project implementation, local government regulation, and popular compliance. Projects such as rail networks tend to take a long time to negotiate due to the unequal distributionary impact of the infrastructure, which will concentrate economic activity and political gain on cities with train stops. Other locations, which will only receive the rail tracks, will lose out relative to those receiving the stops. In other words, intense local elite competition typically occurs when rail projects manifest.

The foreign funder and national governments often need to distribute economic or political rent to receive elite compliance to the plans. To some degree, these issues occurred in HSR in Indonesia, the Eastcoast Railway Link in Malaysia, and the Sino-Thai Railway. This is also the reason why the PNR South Rail and Mindanao Rail projects are experiencing delays. Conversely, infrastructure projects that disburse relatively equal benefits to local elites generate compliance and project progression. Roads cut across numerous cities, airports create multiplier effects, and irrigation projects can be built across farms. As such, the road projects, the Kaliwa Dam, and the Chico Irrigation are steadily moving forward with local elite cooperation and have experienced delays on technical matters instead.

Ultimately, the improvement of macroeconomic foundations during Aquino, a high demand for infrastructures due to domestic activities, and a diversified list of funders minimize debt risk. I recommend that the Philippines and other states establish a new and independent BRI Review Board exclusively for Chinese projects. This board should receive support from international organizations and directly report to the most important institutions of the country. In addition, a review of policies by international development banks that aim to expedite the project funding process will make the banks more attractive alternatives for countries seeing infrastructure loans.

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Filed under China, Economic development, FEATURES, Philippines, Regional Relations, SLIDER

On the Rocks: China’s expected response to tribunal decision threatens to undo soft power gains

South_China_Sea

The Permanent Court of Arbitration is set to rule tomorrow on a case brought by the Philippine government over China’s attempts to claim almost the entire South China Sea as sovereign territory. Beijing has boycotted the tribunal and betting the odds are that the verdict will not be in China’s favor.

Whatever happens tomorrow at the tribunal, Chinese state media is going to claim victory. But within the walls of Zhongnanhai, there ought to be some soul searching. This assumes of course that anyone who works in Zhongnanhai still has something approaching a soul.

Should the tribunal rules against the PRC — as it is expected to — and if the Chinese government chooses to use the tribunal’s ruling to, for example, wipe the ass of the nearest stray dog — as they will almost certainly want to do — the repercussions will ripple far past the rocks and reefs of the South China Sea.

Internationally, China has worked hard over the previous two decades to present itself as a good global citizen. As the US and their allies engaging in what many around the world see as reckless military adventurism, China positioned itself as a semi-sane alternative to the failed — and sometimes disastrous — policies of the West.

Choosing to ignore the tribunal’s ruling jeopardizes this concerted effort at image building. China can point all it wants to the way the US especially routinely ignores these sorts of hearings and decisions, but if the Chinese government is serious about being the voice of reason in a world gone mad they have to better than the US. Caesar’s wife must be above reproach. “You did it first” isn’t going to fly.

The second issue is domestic. Chinese media routinely demonizes the United States and the West for their actions around the world. Implicit in this coverage is the idea that most of the world — those countries who don’t burn summer palaces and invade Middle Eastern nations for sport — see China as the good guy in world affairs.

The Chinese government wants to present every issue as China (and by extension, the rest of the world) versus the West. It’s the US and their allies who are the odd ones out in the world. In some ways, that might be true. But it doesn’t mean that China’s neighbors see China as any less of the threat.

In the case of the South China Sea, Beijing is opposed by countries, like the Philippines, Malaysia, and Vietnam, who ought, by virtue of geography and a shared history as victims of colonialism, have common cause with China.

One reason the Chinese government has been so insistent on the US being the real impetus behind the decision to take the South China Sea case before the tribunal is that it helps soften an awkward truth: China isn’t as beloved around the world — and particularly in asia — as the Chinese state media wants people to believe.

Talking with folks in Beijing, there is the persistent belief that the Philippines and the other countries opposed to China’s territorial grab in the South China Sea are being hoodwinked into becoming the pawns of the usual suspects: The United States and Japan.

The Chinese government has made the South China Sea a core strategic interest. But one wonders if Chinese leaders have thought through the downfield implications of digging in on this issues. Maybe they have and have decided that they are fresh out of fucks to give about what Vietnam thinks of them.

The callous cynic in me might suggest that while China’s actions in the South China Sea represent a challenge to America’s leadership and strategic position in the Western Pacific, Beijing’s refusal to accept the tribunal’s decision could be seen as an opportunity to undermine some of the gains China has made in global public opinion over the past two decades.

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Filed under China, FEATURES, SLIDER, South China Seas, USA

Taiwan: The most important R.O.C. in the South China Sea

Events over the last couple weeks have re-drawn attention, rightfully, to an oft-overlooked player in the South China Sea disputes, Taiwan (aka. Republic of China). SCS analyses often dismiss Taiwan’s claims as a marginal issue and is only mentioned in the context of mainland China’s claims, however as the most recent incidents with the Philippines demonstrate, Taiwan’s strategic importance to the South China Sea (and East China Sea) is actually woven into the very core of disputes.

Fishermen Wars

On May 9, a 65 year old Taiwanese fishermen named Hung Shih-cheng was shot and killed by the Philippine Coast Guard in a standoff. The PH Coast Guard claims that they shot at Mr. Hung’s vessel  to disable the engine as a self-defense mechanism because the fishing boat was attempting to ram-and-run. Eye-witness accounts through Taiwanese media however, report that the boat was struck by 30-40 bullets, which seems excessive. Mr. Hung was unarmed, accompanied on the boat by his son and two other sailors.

On May 10th, the news broke and Philippine officials acknowledged the incident and indicated investigations have began. Coast guard commander Rodolfo Diwata Isorena indicated that the 11 officers involved have been suspended from duty. On May 12, with tensions running high on both sides, Taiwan issued a 72 hour ultimatum to the Philippine authorities, demanding formal apology from the President, appropriate reparations to the fishermen’s family, and extradition of perpetrators to Taiwan for investigation to ensure “justice”. On May 15th, just minutes before the deadline, the Philippines announced that it would send its representative to Taiwan to apologize but that no extradition will occur and was unclear with regards to reparations. Taiwan subsequently rejected this apology declaring it insincere and insufficient. It announced a series of retaliatory actions, including withdrawing its diplomatic representative, conducting elevated sea patrols, and sanctions on work permits for the nearly 87,000 Filipinos working in Taiwan. The last action would prove to be costly to the Philippines which sends over a million workers overseas each year and is heavily reliant on remittances.

On May 17, Taiwan carried through with its threat to conduct joint Naval – Coast Guard drills in the SCS, the first time ever crossing the 20* latitude “temporary enforcement line” since the Taiwanese government established it in 2003. Taiwan indicated that these drills, along with heightened patrols (increase of 1-2 ships to 3-4 ships) are not a one-off occurance but will continue indefinitely, in order to ensure the safety of its fishermen. Continue reading

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A Primer to the Philippines’ South China Sea Arbitration Challenge to China

Earlier in January this year, the Philippines submitted a unilateral challenge to China on certain key aspects of their ongoing dispute in South China Sea (SCS) maritime delimitations under the United Nations Convention on the Law of the Seas (UNCLOS). This challenge will take the form of an arbitration case before the International Tribunal on the Law of the Seas (ITLOS). To the uninitiated, this move is intriguing but unclear as to its real-world implications for international maritime law or the future of SCS geopolitics. The following primer attempts to translate the dense jargon of maritime law, distill the meanings behind subtle diplomatic language of Claimant States, and untangle the intricate web of geopolitical maneuvering to provide a clearer, layman picture of this case and its implications for the SCS disputes.

Why the arbitration case?

The ongoing dispute between the Philippines and China has been simmering for many years. Ever since a joint exploration agreement (along with Vietnam) to conduct seismic review of potential hydrocarbons in the SCS region collapsed in 2007, the tone and intensity of SCS disputes have escalated.  The situation came to a head when in early 2012, Chinese Coast Guard ships came into confrontation with a Philippine naval ship over harassment of fishermen in Scarborough Shoal, a formation in the Spratlys (南沙in Chinese). The Scarborough Shoal standoff did not end well for the Philippines as China has now established an ongoing blockade of the shoal. (More discussion of this standoff and its implications to follow in a later article) In response, the Philippines moved for ASEAN to issue a unified statement to China censoring it for its actions in the South China Sea. However, other ASEAN members proved reluctant to do so for many reasons. (More discussion of this will come in a later article) Suffice it to say, by Fall 2012, the Philippines began actively exploring other options to pursue its dispute with China.

What is happening?

To the layman observer of SCS disputes, the Philippines’ move to challenge China by arbitration may have been surprising. After all, it’s generally understood that China studiedly avoids multilateral engagement on SCS disputes and/or 3rd party mediation, insisting that the SCS disputes are a regional issue that should be addressed on a bilateral basis. Questions regarding this case include:

  • Can the Philippines unilaterally bring China to arbitration? And if so, does China have to engage?
  • Regardless of China’s engagement, does the ITLOS have jurisdiction to rule on the challenges?
  • What are the points the Philippines is challenging?
  • Even if ITLOS has jurisdiction to rule on certain aspects of challenges put forth, what are the actual implications for SCS disputes?

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Filed under ASEAN, China, Energy, Foreign policy, Philippines, Regional Relations, Uncategorized, water