2018 began with a recap on the trade and investment performance of countries in the East Asian region for the previous year. Events during the first quarter of the year highlighted Japan’s and India’s initiatives as well as their cooperation in the Indo-Pacific region. As for Philippines-China bilateral economic relations, a number of controversies appeared to undermine their improving ties and continued to feed skepticism about the value and viability of their close cooperation.
China’s increasing economic engagement with SEA
In 2017, ASEAN and China’s bilateral trade increased by 13.8 percent from 2016, according to the Chinese Ministry of Commerce. China’s top trading partners in the region were Vietnam, Malaysia, and Thailand. Vietnam was China’s biggest export destination, while China imported goods mostly from Malaysia rather than its neighbors. China also became Indonesia’ssecond biggest investor, next only to Singapore, last year.
Despite the increase in trade volume and Beijing’s pouring of infrastructure pledges, Japan remains the toploan provider in the region with $230 billion infrastructure investments as compared to the former’s $155 billion, according to BMI Research in Singapore. Japan dominates investments in the Philippines and Vietnam. Expectedly, Tokyo has been providing financial assistance to Southeast Asia for decades, far ahead of Beijing.
In the Philippines, the National Economic and Development Authority released a list of 13 newly approved infrastructure projects. Six of them, worth P715 billion, will be funded by Japan. The others are funded by other official development assistance (ODA) partners like the Asian Development Bank, China and Korea. Of the six supported by Japan, five are transportation projects, while one is on flood management. On March 1, the two countries inked an agreement for the construction of the P4.6 billion Road Bypass Project in Bulacan. Tokyo will also provide P276.1 billion for Phase 1 of the subway from Quezon City to Taguig—described by the Department of Finance (DOF) as “the biggest amount Japan has ever committed to any country”.
Meanwhile, early this year, China continued to promote the Belt and Road Initiative (BRI) by approving guidelines for the establishment ofa trade dispute mechanism, which Beijing says will be based on the principle of “wide consultation, joint contribution, and shared benefits". The proposed headquarters will be in Beijing. Courts in Xian and Shenzhen shall respectively handle disputes on the Silk Road Economic Belt (the land connectivity networks in Central and South Asia) and the Maritime Silk Road (including links to Southeast Asia and presumably, the Philippines).
Japan’s and India’s responses to BRI
A new initiative for an Indo-Pacific Strategy was introduced during the ASEAN Summit week in Manila in 2017. The Indo-Pacific concept was much touted by US President Donald Trump during his visit to several Asian countries late last year. It is perceived to be mainly a security response to China’s growing influence, but it likewise has an economic connectivity dimension. Shortly after their East Asia Summit, proponents of the Quad - the governments of Australia, India, Japan, and the United States - began talking of an alternativeto the BRI. Initially, the Quadrilateral Security Dialogue is an informal strategic dialogue among the four leading democracies which ceased after Australia withdrew. However, it was revived simultaneously with Trump’s statements on Indo-Pacific, emphasizing the inclusion of India in the region.
It is also noteworthy that Japanese ODA is going to be linked to the promotion of a broader "Free and Open Indo-Pacific Strategy”, which includes "high-quality infrastructure”. However, each state has its own approach and responses to the Chinese economic initiative.
Japan, for one, indicated it would consider participation in BRI projects on a case-to-case basis—that is, for Prime Minister Shinzo Abe, only profitable, transparent, civilian ventures will be approved for collaboration. Japanese Foreign Minister Taro Kono conveyed this as well to his Chinese counterpart Wang Yi during their bilateral meeting in January.
Aside from that, Tokyo encourages its private entrepreneurs to “do business with China as part of the initiative” (referring to the BRI), and the Japanese government will assist in coordination and finance. However, how deeply involved Japan will be remains unclear.
India likewise has openly shown opposition to the BRI, and yet the China-led Asian Infrastructure Investment Bank recently approved $1.5 billion loans for the South Asian country’s energy, roads, and urban development projects. India is also the second largest contributor to the AIIB. Notably, on January 26, New Delhi welcomed the ASEAN member states to its Republic Day and reached outto the bloc for investments and connectivity cooperation.
For the Philippines, Filipino and Indian business delegations forged a total of $1.25 billion worth of investment agreements, which is expected to create approximately 10,000 jobs, during Philippine President Rodrigo Duterte’s visit on January 24-26. Business agreements on IT-BPO, tourism, hospitality, aviation, and pharmaceuticals were signed. Indian firms have expressed interest in the Build Build Build Program as well.
PH-China cooperation grows
Many have been wondering why progress in Chinese infrastructure projects has been so slow. On March 10, P4.37 billion in Chinese funding for Chico River Pump Irrigation was finally approved. From the same first basket of projects submitted for Chinese funding as early as the first quarter of 2017, a friendship bridge in Manila supported through a Chinese grant also finally commenced construction. Naysayers, however, criticized the bridge as a waste of time and resources.
Other project updates include the signing of the Manila Waterfront City Project< between the CCCC First Highway Engineering Co. and Waterfront Manila Premier Development Inc.; and the groundbreaking of the two new drug rehabilitation centers in Saranggani and Agusan del Norte provinces on January 12 and February 12 respectively. It was also reported that China will fund the Mindanao railway project, whose Phase 1 is being funded by the government through the General Appropriations Act.
The DOF invited the Alibaba Group, together with the Philippine private sector, to partner in developing technologies for e-commerce that are user-friendly. Finance chief Carlos Dominquez said in a statement that the potential partnership will benefit rural communities as well as small and medium enterprises. The Board of Investments and the Bank of China also signed a cooperation agreement on the conduct of investment seminars and business matching activities.
In March, 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. Panda bond sales will be converted to pesos and will be used to fund the government’s infrastructure projects. In diversifying sources of financing, the government also planned to sell samurai bonds, Japan’s version of IOUs, according the Dominguez.
In aviation, the flag carrier Philippine Airlines increased its trips to China from 99 to 103 flights weekly starting March 25.
Despite pursuing friendly cooperation, controversies never left PH-China relations. First, there are still skeptics about close cooperation, particularly raising alarm bells about corruption and lack of transparency. An assessment conducted by the Philippine Center for Investigative Journalism (PCIJ) revealed that not all documents concerning major infrastructure projects are accessible to the public. Opposition lawmaker Gary Alejano filed a House Resolution urging Duterte to disclose loan terms to Congress and to allow both Houses to review and assess these terms.
Second, there is an ongoing inquiry in the Senate on the compatibility of MRT3 coaches procured from a company in Dalian by the previous administration. However, a consultant with a former MRT maintenance contractor claimed< that the weight of the procured train is within the allowable limits given by the then Department of Transportation and Communications.
Third, a public furor was caused by a statement by Chinese scholar Zhuang Guotu of Xiamen University that natural resources may be used as collateral for Chinese loans to the Philippines. However, Chinese Foreign Ministry spokesperson Geng Shuang denied this, saying that “China has never asked and will never ask relevant countries to use natural resources as collateral in loan agreements”.
Fourth, the government granted a provisional license to a Macau-based operator to establish a casino-resort in Boracay despite Duterte’s moratorium on the construction of new casinos, and despite the declared six-month closure of the island for environmental rehabilitation. Construction of the casino-resort is expected to commence in 2019.
Fifth, local residents of war-torn Marawi City were dismayed with the Bangon Marawi Task Force proposal to create a new Marawi ecozone within the former main battle area of last year’s siege by the Maute extremists. The task force clarified that this is a mere proposal from the Philippine Economic Zone Authority, but then it released the names of companies taking part in the consortium, including five Chinese and four local firms. A Swiss Challenge will be undertaken by May.
Observations and Analysis
With the ambitious Build Build Build program of the Duterte administration, the Philippines is going to need an array of major sources of infrastructure financing. Chinese support in the form of loans, grants and investment pledges is drawing a lot of attention because it is a new player in the local infrastructure development scene, because it is perceived as being awash with cash and eager to lend, and because of what the Duterte administration appears to be willing to give up in order to access these funds (including - by some accounts - sovereign rights and close security ties with the US). But the reality on the ground is a very slow implementation (and little impact) of the anticipated Chinese state largesse so far, and the Philippines continues to tap Japan, other countries and international financial institutions for its development needs.
China alone cannot provide what the Philippines requires, as the Philippines is only one of potentially 60 plus countries targeted by China’s Belt and Road Initiative. However, Chinese participation does offer clear benefits including acceptable repayment terms, potential access to new technologies, plus a foundation for the improvement of overall political relations. If smartly negotiated, carefully managed and put into the best and most productive uses (rather than white elephants like huge drug rehabilitation centers), fund infusions from China can help spur growth and sustain our good GDP performance of recent years.