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The Philippines

Needing big-ticket investments, Rodrigo Duterte turned to China. The Philippines is still waiting

China could play a key role in aiding the Philippines’ struggle to build a modern infrastructure, but there are doubts about its commitment

PUBLISHED : Sunday, 03 June, 2018, 6:16pm
UPDATED : Sunday, 03 June, 2018, 7:28pm

At the heart of Philippine President Rodrigo Duterte’s foreign policy is the pursuit of a golden age of bilateral relations with China. What drives this strategic impulse is the fervent hope to usher in a new era of economic partnership with Asia’s biggest economy.

Duterte views his country’s traditional alliances, particularly with America, as passé and increasingly irrelevant to the Philippines’ contemporary developmental needs.

Almost two years into Duterte’s presidency, however, big-ticket Chinese investments are yet to take off, and concerns still linger over the quality and sustainability of prospective Chinese investments in the Southeast Asian country.

Nonetheless, China could play a critical role in easing the Philippines’ decades-long struggle with building a modern infrastructure.

Though featured among the world’s fastest-growing economies, the country is in desperate need of spending on crucial facilities. In the World Economic Forum’s latest competitiveness report, the Philippines ranked 97th in the world in terms of infrastructure.

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The Asian Development Bank estimates that the Philippines’s infrastructure needs over the next decade could stand at a staggering US$127.12 billion. This amounts to about US$11.56 billion annually.

In core industrialised regions, particularly Metro Manila, the Philippines desperately needs an upgrade amid a huge population increase and demands for improved public transport.

According to an authoritative report by Japan International Cooperation Agency, the capital city will need to spend close to US$60 billion to deal with its massive traffic congestion problem.

In peripheral agricultural regions, particularly in conflict-ridden southern island of Mindanao, there is a dearth of even basic infrastructure. Because of the security risks, traditional investors, both foreign and local, have remained aloof.

In response, the Duterte administration has launched a US$180 billion “build, build, build” infrastructure spending project to transform the Philippines’ economy.

But neither domestic revenues nor traditional sources of external funding is likely to be sufficient to match the huge financing challenge. And this is precisely where China comes in.

Equipped with about US$4 trillion in currency reserves, and overseeing world-class state-affiliated enterprises such as Huawei and ZTE, Beijing is in a strong position to revamp the economies of smaller neighbouring states.

By joining the Asian Infrastructure Investment Bank and signing on to the “Belt and Road Initiative”, the Philippines is hoping to tap into China’s largesse.

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During his state visit to China in 2016, Duterte secured close to US$24 billion in investment pledges. In the past year, estimates of Chinese investments have varied widely, ranging from as low as US$3.7 billion to as high as US$50 billion.

No one knows the exact amount China has sequestered for state-driven investments in the Philippines. Much will depend on policy banks such as China Development Bank, Bank of China, Industrial and Commercial Bank of China and Export-Import Bank of China that will serve as key sources of financing.

Meanwhile, private sector-driven investments from China have also steadily expanded, particularly in the real estate and gambling sectors.

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The uptick in Chinese property purchases, both for residential purposes and setting up online casinos, has countered the decline in the American-dominated business process outsourcing sector.

But there are three key concerns regarding Chinese investments. First, there are doubts about whether China will actually commit anywhere close to its original pledges. During Duterte’s first year in office, Japan (US$600 million) outinvested China (US$31 million) by almost 20 times; Americans (US$160 million) invested five times more.

Second, there are concerns over the quality and sustainability of Chinese investments. A decade ago, two major infrastructure projects, the NBN-ZTE (US$329.5) contract and Northrail (US$431 million), failed to take off because of allegations of corruption and bidding anomalies.

According to a report by the Philippine Centre for Investigative Journalism, some of the Chinese companies involved in infrastructure projects in the Philippines are among those blacklisted by the World Bank. Their competence, liquidity and track record seem questionable at best.

The Duterte administration will have to ensure that big-ticket Chinese investments meet domestic regulations on good governance, lest similar scandals derail the much-needed projects.

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There are also concerns about possible domestic resentment against Chinese investors and projects. In recent months, the influx of close to 100,000 Chinese, mostly employed in newly established online casino enterprises, has led to an almost 30 per cent surge in property prices in parts of Manila.

Overreliance on Chinese labour, technology and capital could also spark a backlash among the Philippine public and domestic conglomerates. And as Chinese investments grow over the years, the country’s economic health could become a hostage to the broader dynamics of bilateral relations with Beijing.

Yet the lure of a Chinese wave of investments, both state-driven and from the private sector, is proving irresistible to the Philippine leadership.

For Duterte, China is an indispensable source of much-needed capital and technology if the Philippines is to address its perennial economic challenges.

Richard Heydarian is a Manila-based academic and author of Asia’s New Battlefield: US, China and the Struggle for Western Pacific