ASEAN-China and intra-ASEAN connectivity
More ports are sprouting in Indonesia, one of which in an industrial zone that will have direct access to both domestic and international markets. Ningbo Zhoushan Port and China Communications Construction Engineering Indonesia have inked memorandums of understanding with Indonesian port operators to jointly develop New Priok and Kendal International Port, respectively. However, there are no actual investments that are known to have been made. In April, the archipelago's Chief Maritime Minister Luhut Panjaitan visited Beijing to restate calls to invest in the Kuala Tanjung and Bitung international ports. He brought back $23.3 billion worth of deals from his trip. These contracts are for power plant projects, the development of an industrial park, and electric vehicles.
In Malaysia, President Mahathir Mohammed said the country will continue a “friendly” relationship with China and “make best use” of the Belt and Road Initiative to connect East Asia and Europe. Despite this earlier statement, the newly reelected leader announced that a planned high-speed rail project between Kuala Lumpur and Singapore to be funded by China will not push through as he wants to reduce national debt. The project was in its early stage and had not yet received Chinese funding as well.
On the other hand, to reduce dependence from Beijing, Thailand announced plans to initiate a regional infrastructure fund with Cambodia, Laos, Myanmar, and Vietnam that is expected to be operational next year.
Vietnamese rallied against the controversial Special Zone Act, a law that would create special economic zones intended to invite investments and spur economic reform, and which allegedly would have handed the zones to Chinese investors. This proposal brought mass protests in Ho Chi Minh City and Hanoi, which soon spread to towns in six provinces, including Da Nang, Nha Trang, Binh Thuan, and Tai Ninh.
Meanwhile, China continued to open up its southern coastal area to foreign visitors. Entry to Hainan may now be accessed by 59 countries, including the United States, without a visa. Excluded from the list, however, are African countries, countries on the Indian subcontinent, as well as three members of Association of Southeast Asian Nations: Vietnam, Laos, and Cambodia. Shortly after this announcement, Philippine Airlines launched a new route to the island, after increasing its trips to other cities in China earlier in the year.
Neighbors flock to invest in the Philippines
Earlier we had reported that Japan will fund six of the newly approved infrastructure projects identified by the National Economic and Development Authority Board, namely: Cavite Industrial Area Flood Risk Management Project, Arterial Road Bypass Project – Phase III – Request for Change in Source of Financing (formerly Plaridel Bypass Road Project), Malolos-Clark Railway Project (PNR North 2), PNR South Commuter Project, Maritime Safety Capability Project II, and Metro Manila Subway Project (MMSP) – Phase 1. According to the Department of Transportation Director Hope Oliveros-Libiran, Japan will supply workers for the project. Japan International Cooperation Agency promised that MMSP will be handled by well-trained construction workers, operators, and maintenance personnel.
Other developments in Philippines-Japan relations include discussions between DPWH and JICA for the conduct of feasibility study on a master plan for flood prevention in Davao City. The third round of industrial cooperation dialogue which was to focus on strategic areas of partnership was also held, with Japan extending help to the Philippines to “take advantage of its competitiveness and position itself as a manufacturing hub in the ASEAN region,” said Satoshi Miura, the head of Japanese delegation and Japan Ministry of Economy, Trade and Industry official .
Further, Davao City Mayor Sara Duterte led a delegation of city officials to visit Japan and learn best practices and experiences in infrastructure development, particularly on urban planning in Tokyo. They visited projects on suburban area Science City planning, Murasaki River pollution prevention, and Kitakyushu environmental and international strategy.
In early April, President Duterte attended the Boao Forum in Hainan, China where a memorandum of understanding on the employment of 2,000 Filipino teachers of English language in China was signed. The MOU, which outlines salaries, work hours, benefits, and employment rules, may be renewed after two years. The exchange of letters also included pre-feasibility study of the proposed Davao City Expressway Project, broadcasting equipment, technical cooperation for the Filipino-Sino Center for Agricultural Technology, and other economic and technical cooperation agreements. The 27.52 million renminbi cooperation on agriculture would modernize the Philippines’ hybrid rice center and in turn boost the country’s palay production.
Duterte also witnessed the signing of letters of intent by nine Chinese companies to invest around $9.45 billion and establish operations in real estate, tourism, agriculture, and other sectors in the Philippines. They are Shanghai Geoharbour Group, Jovo Group Co. Ltd., Zhongfa Group, Haocheng Group, China Green Agriculture Group, East-Cloud Biz Travel Ltd., China National Heavy Machinery Corporation, Shanghai Shinehigh Biotechnology Ltd. Co. Zheijiang Dongyang Jinxin Chemical Co. Ltd., and Sino Building Materials Group.
Meanwhile, the Chinese grant of 59.859 million renminbi for the Pasig River bridge will cover detailed engineering design and construction supervision by CCCC Highway Consultant Ltd; while contractor China Road and Bridge Corporation will implement civil works amounting to 583.6 million renminbi. Among the second basket of infrastructure projects, China is interested to finance an airport, details of which have yet to be disclosed.
On energy, Philippine fuel retailer Phoenix Petroleum said it had agreed to partner with a subsidiary of state-owned China National Offshore Oil Corp (CNOOC) to explore building a receiving terminal for liquefied natural gas in Batangas. It may be recalled that Phoenix and CNOOC had often been mentioned in past media reports as the original interested parties for possible joint development in the Philippines’ Reed Bank, which overlaps with the so-called nine-dash line.
In a tally made my Rappler, Duterte had at least 14 meetings with Chinese business groups since 2016, 13 with Filipinos, three with Americans and two with Japanese at the Palace or in Davao City.
Following his visit to China for the Boao Forum, Duterte flew to Singapore and witnessed MOUs inked between Filipino and Singaporean companies for trade, scientific and technological cooperation, urban development, information and communication technology, energy, among others. The Philippine Chamber of Commerce and Industry and Filinvest Development Corporation joined as parties to the MOUs.
On the other hand, there were indications that the Philippines has begun to reposition itself as Taiwan’s gateway for its New South Bound Policy. Aside from a seven-fold increase in Taiwanese foreign direct investment to P10.833 billion in 2017 from the previous year, there are efforts to get Filipino products into Taipei’s mainstream market rather than only in Philippine stores and expatriates’ households.
On the watch list
The Bangon Marawi Consortium (BMC), composed of five Chinese and four local firms, was tapped to rehabilitate the Most Affected Area (MAA) in Marawi following the months-long siege of the city. Negotiation for the terms of reference, costing, and other details of the projects began in April, with a project design expected in a month and set to undergo a Swiss challenge. Task Force Bangon Marawi tasked the consortium to work on the site development plan, road infrastructure, provision for underground utilities such as water, power, and telecommunications, centralized wastewater treatment, school buildings, and port facilities.
However, there was a sudden turn of events when the BMC was disqualified after failing to show financial capacity to complete the project. The Task Force immediately proceeded with another potential partner, the Power Construction Corporation of China. It was also reported that China State Construction Engineering Corporation and China Geo Engineering Corporation were allegedly barred from participating in projects financed by the World Bank years ago.
We recall in March that the Central Bank of the Philippines raised P1.46 billion RMB from its maiden panda bonds or yuan-denominated debts sold by foreign issuers in China. The national government debt hit P6.879 trillion by the end of first quarter predominantly due to “currency fluctuation and net issuance of government securities”, as per the Bureau of the Treasury. In April, however, debt was recorded at P6.874—lower compared to the previous month due to stronger peso and third currency fluctuation.
The government’s economic team assured the public that the Philippines is capable of paying the loans and will not fall into “debt-trap”. “We can pay it. We borrowed at three percent in the US, why can’t we borrow at two percent from China?” Finance chief Carlos Dominguez said, referring to the $2 billion global bond sale early this year. This was in line with media reports quoting a Chinese scholar that Philippine natural resources would be used as collateral for these loans, which Beijing denied. Dominguez added that the results of these offshore bond sales showed investor confidence in the Philippine economy. NEDA officials clarified that China loans are lending financing and are not tied to ownership of the land. Even budget chief Benjamin Diokno announced that the government will raise foreign borrowing from the initial 20% to 25% of the total financing program for the next five years, citing good interest rates for major infrastructure deals.
Asian Development Bank also expressed that they were confident that the Philippines’ macroeconomic fundamentals can handle the Chinese debt load. The bank’s Vice President Stephen Groff said, “There aren’t any major concerns at the moment about debt sustainability in the Philippines.” He added that the key for both lender and borrower was transparency, clear conditions for agreements, and projects that would have high returns. The country will also prepare for its $1 billion samurai bond by August.
The Philippines continued to attract Chinese visitors primarily for business and tourism, and their flocking to the country yielded impacts on real estate. Real estate developers attributed the majority of their sales to foreigners, especially the Chinese. This is a shift from OFW buyers. An estimate of 100,000 Chinese have flooded into Manila since September 2016. This is due to the strength of Philippine online gaming operators industry in the country. More than 50 offshore gambling companies were permitted to operate since the Duterte government began awarding licenses 19 months ago. The companies need Chinese speakers to attend to marketing, payment, and inquiries from customers abroad.
Condo sales in Metro Manila rose. Although the Constitution prohibits foreigners from owning land, the Condominium Act (Republic Act No. 4726) allows foreign nationals to acquire units and shares for up to 40% of the total stock of a Filipino-owned condo corporation. The purchases by Chinese temporary immigrants or visitors have started driving up prices, making units more expensive for the locals. This, however, might leave the real estate industry vulnerable in the event of abrupt changes in online gaming or immigration policies from either China or the Philippines.
In the Southeast Asian region, there have been instances of governments reviewing and modifying MOUs or agreements with China, or of slow implementation. These trends show that states are being more careful in embracing Chinese offers, especially after seeing what happened to Hambantota port in Sri Lanka, which failed to generate funds for repayment. They are paying attention and learning from the experiences of others, but should also learn from the successful cases of Chinese infrastructure aid and investments in order for the state to make the most of opportunities while avoiding blunders What went right? What went wrong? Pay attention to the mix of ingredients. Can this be replicated? Is it actually viable for your country?.
For both the Philippines and China, it is important to set indicators or criteria on what makes for successful cooperation. The value of a project can only be fully assessed when it is already operating, but the processes of cooperation with financers from feasibility study to implementation can be critical.
On the part of the Philippines, the huge increases in numbers of Chinese visitors in some industries, initially in real estate, online gaming and casinos, will pose certain challenges both for the public sector (e.g. enforcement of immigration and labor laws) and the industries themselves.. For now, these industries might be enjoying the benefits, but they must also have measures in place to avoid being critically affected, should sudden changes occur.