assessments

Jan 2, 2019 | 10:00 GMT

7 mins read

The Philippines Waits for a Chinese Windfall

Chinese President Xi Jinping, right, and Philippine President Rodrigo Duterte, left, inspect the troops during a welcoming ceremony at the Malacanang Palace in Manila on Nov. 20, 2018.
(TED ALJIBE/AFP/Getty Images)
Highlights
  • China's pledges to improve the Philippines' infrastructure on a massive scale have not come to fruition, but the investment might not come unless Manila rectifies some of its internal issues.
  • Despite the comparatively low levels of investment from Beijing so far, Chinese entities are likely to be more amenable to funding projects in the Philippines' distant provinces than their Western counterparts.
  • As the Philippines deals with internal issues, the countries' mutual political will means Manila and Beijing will likely pursue closer infrastructure cooperation during the second half of President Rodrigo Duterte's term.

Since 2016, conciliation with China has been the name of the game for Philippine foreign policy planners. Under President Rodrigo Duterte, Manila has de-emphasized thorny South China Sea disputes in favor of pursuing cooperation with China in the hopes of freeing up resources to quell internal instability while attracting Chinese investment to bolster the Philippine economy and even out the island country's deep regional development disparities.

The Big Picture

With the great power competition between the United States and China set to gain momentum in 2019, China's detente with the Philippines will become increasingly important. As in mainland Southeast Asia, Central Asia and elsewhere, China's ability to leverage its massive economic heft to its strategic advantage will be critical.

For Beijing, the warmer relations with Manila align with its preference for dealing with each of the South China Sea's claimants on a bilateral basis, along with its overall regional strategy to leverage its economic heft for strategic advantage, embodied especially in its sprawling Belt and Road Initiative. As Duterte nears the midpoint of his term in office (he will remain in power until 2021), the jury is still out on whether his approach has been a success – and whether it will be politically sustainable. Despite two high-profile state visits and a raft of pledges, Chinese investment has yet to flow into the archipelago. Ultimately, if China wants to wield long-term influence in the Philippines, it will need to deliver on the ground.

Promises Given

Duterte wasted no time in making overtures to Beijing. Just three months after assuming office in June 2016, he visited China, where he bombastically heralded his country's "separation from the United States" and the resumption of bilateral talks with Beijing on the South China Sea after a four-year hiatus. For its part, China lifted an embargo on Philippine fruit, while promising an influx of tourists to the island nation. The two sides also signed around $24 billion in credit and investment pledges that included $5.5 billion for infrastructure, a $3 billion business credit line, a $1 billion hydropower project, as well as a $700 million steel plant and $780 million port project in Duterte's hometown, Davao City.

In May 2017, Duterte traveled to China once again to attend the inauguration of the Belt and Road Initiative. Eleven months later, Duterte returned to China, while Chinese President Xi Jinping reciprocated in November 2018, conducting the first Chinese state visit to the Philippines in 13 years. During Xi's trip, Beijing and Manila signed 29 agreements on cooperation that included deals on further investment and credit, joint energy development in the South China Sea and the Philippines' formal accession to the Belt and Road Initiative. Xi also invited Duterte to pay his fourth visit to China in 2019 to attend a forum on the Belt and Road.

Beijing's pledges are meant to serve as a cornerstone of Manila's ambitious infrastructure push. In 2017, the Asian Development Bank ranked the Philippines 112th out of 138 countries in infrastructure quality, noting that even the core island of Luzon suffered serious infrastructure problems. Duterte has made infrastructure upgrades a central plank of his political program, while pledging to ameliorate uneven infrastructure development in the rest of the country as well. Launched early in his tenure, Duterte's Build Build Build initiative aims to conduct $160 billion to $180 billion in new infrastructure improvements through 2022. Since coming to power, Duterte has indeed raised infrastructure spending from a mere 2.7 percent of gross domestic product between 2011 and 2015 to 6.3 percent of GDP at the start of 2018. (The president's original goal was for 7 percent of GDP by 2019.) But given that only 13 percent of Philippine infrastructure investment came from foreign sources — as opposed to nearly 40 percent in Vietnam — Duterte will require much more investment from abroad if he is to attain his goal. In the 75 projects earmarked for Build Build Build, the Philippines is expecting Chinese funding in around half of them.

Promises Kept?

Despite the formidable pledges, however, much of this Chinese largesse has yet to materialize. In 2017, the Philippines' top five sources of foreign direct investment (FDI) were Japan (30.3 percent), Taiwan (10.3 percent), Singapore (9.6 percent), the Netherlands (9.1 percent) and the United States (8.3 percent). China, by contrast, has only managed to deliver on a small proportion of its total figure: a $73 million irrigation project and headway on two bridges totaling $75 million.

This chart depicts the main sources of foreign direct investment to the Philippines.

In fact, China's FDI share in the Philippines constituted just 2.2 percent of the total in 2017, putting it 14th — about on par with levels over the past seven years. Put another way, it is the United States and its allies, like Japan, South Korea, Australia and Taiwan, that have heretofore made the bulk of investments (56 percent) in the Philippines, rather than China.

While Philippine media have been awash in stories about China's ostensible decision to renege on its promises, the lack of investment stems largely from the island country's internal issues. For example, the local Davao government backed out of a China Harbour Engineering Co. project to develop the island's coastline and port in 2017, citing environmental and economic viability concerns. Elsewhere, a Philippine company that was set to partner with China Harbour Engineering also abandoned a project to reclaim land for the Manila Harbour Centre project. Meanwhile, a prospective $700 million stainless steel plant that would have featured a joint venture between a local company and China's Baiyin Nonferrous Group is currently on hold because of the Philippines' blanket ban on new mining projects.

The Asian Development Bank has cited the Philippines' elaborate feasibility study process as a barrier to investment flows; anecdotal evidence also suggests this has hamstrung or delayed much of China's investment. Additionally, continued political uncertainty in the southern island of Mindanao in the wake of the high-profile Islamic State takeover of the local city of Marawi has put infrastructure projects there in question.

Nevertheless, there have been bright spots for Sino-Philippine investments. Even though it was still a proportionally small share of the total, Chinese FDI in the Philippines did, in fact, rise nearly 54 percent from 2016 to 2017. By contrast, U.S. investment dropped by nearly three-quarters, while Australian investment fell by almost 90 percent. Preliminary figures from 2018 also show a rise in approved Chinese FDI in the Philippines. Xi's recent visit, meanwhile, gives cause for hope in regard to expanded Chinese investment. For instance, U.S. companies have been lukewarm about redeveloping the former U.S. Clark Air Base, but China's Gezhouba Group has expressed formal interest about constructing a $2 billion industrial park there. At the same time, state-owned China Telecom has also gained a coveted spot in the Philippine market.

While China's Belt and Road Initiative has faced political headwinds elsewhere, mutual political will is still high in both Beijing and Manila for expanded infrastructure investment.

While China's Belt and Road Initiative has faced political headwinds elsewhere, mutual political will is still high in both Beijing and Manila for expanded infrastructure investment. And with the popular Duterte still in office for another two years, China and the Philippines can accomplish much in the coming years. In this, the Philippines' non-core regions will be critical in shoring up China's image as an economic benefactor to the island country. China's major advantage across the global south has been its ability to direct investment toward projects in neglected or risky regions where Western businesses have not deigned to enter. In the Philippines, Luzon attracted over 83 percent of the total approved FDI from all sources in 2017. Of the remainder, over 12 percent went to the nearby Visayas, leaving the rest of the populous country to settle for just 5 percent of the FDI. 

If China can step in to ensure a more equitable distribution of investment, it would do much to shore up Duterte's image as a president challenging the dominance of core islands. Ultimately, however, much will depend on the Philippines' internal issues, like the peace process in Muslim Mindanao, the fight against communist insurgents, long-anticipated measures to introduce federalism and the role of the Supreme Court in checking Duterte's agenda. But with Beijing and Manila's interests aligning on a vast array of topics, the two sides will continue to find a way forward to meet their mutual interests.

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