Governance NewsPart 4 News: General Business Environment

Duterte struggles to sell his China pivot at home

Little has come of Beijing’s $45bn of promised investment. But the Philippine president is doubling down

Cliff Venzon | Nikkei Asian Review | October 9, 2019

China-backed projects have faced stringent reviews, public backlash and cancellations, posing a challenge for Duterte as he tries to use Chinese money to build infrastructure, create jobs — and to cement his legacy. (Nikkei photo illustration/Source photo by Reuters)

SUBIC, Philippines — A five-minute speedboat ride from Luzon, Grande Island is one of the closest white sand beach resorts to the Philippine capital of Manila. Once part of a major U.S. naval base in the Pacific, it was handed back in the 1990s and taken over by the tourist trade.

Last year, the local investors who hold the lease on the island agreed a deal with Sanya Group, a Chinese resort developer, who pledged to invest $298 million to turn the 44-hectare island into Manila’s answer to the Maldives. The deal was formalized in April, on the sidelines of China’s Belt and Road summit in Beijing. A few weeks later, it all fell apart.

Sanya’s proposal to build “80 ultra-high-end housing units perched on top of the water” would have flouted a law that limits the use of archipelagic waters exclusively to Filipinos. Furthermore, the deal had been sealed without the approval of the Subic Bay Metropolitan Authority, which has jurisdiction over the island. “There is bad faith,” SBMA Chairwoman Wilma Eisma told the Nikkei Asian Review.

In a final blow, the defense establishment also raised objections to the project — “We did not make an official statement, but individual officers, I believe, aired their concerns through the media,” said a Philippine Navy official.

Sanya’s proposed investment is not the only project to be thrown into uncertainty or fail in the face of military opposition. A $2 billion “smart city” proposed by Xiamen-based Fong Zhi Enterprise on the privately owned Fuga Island in the northern Philippines — close to Taiwan — is currently facing criticism over potential security issues. A Chinese bid to take over the bankrupt Hanjin shipyard in Subic Bay was effectively blocked earlier this year after the Philippine Navy raised concerns.

Grande Island, about 145 nautical miles from the disputed Scarborough Shoal. (Photo courtesy of Subic Bay Metropolitan Authority)

The fate of these high-profile deals has exposed the limits of President Rodrigo Duterte’s pivot to China. Three years ago, the Philippines’ president announced his “separation” from the U.S., in exchange for Beijing’s promise to invest in infrastructure and job creation. “I need China more than anybody else at this time of our national life,” Duterte said in a public speech last year. “I need China.”

Many in the Philippines do not agree. Distrust of China runs deep in the Philippines, particularly in military circles, where Beijing’s motives are often seen in the context of the two countries’ ongoing dispute over territory in the South China Sea. China-backed projects have faced stringent reviews, public backlash and cancellations, posing a challenge for Duterte as he tries to use Chinese money to build infrastructure, create jobs — and to cement his legacy.

China’s President Xi Jinping, left, and Philippine President Rodrigo Duterte toast during a state dinner in Manila in 2018.   © Reuters

“It might not affect Duterte’s remaining days in office, but it would likely reinforce the perception that yielding too much to China doesn’t pay at all,” said Collin Koh, a research fellow at the Institute of Defence and Strategic Studies in Singapore. “And it could have a potentially adverse impact on the coming [2022] presidential elections and candidates, specifically those who may be campaigning on a pro-Beijing platform.”

High hopes, stalled plans

Duterte’s dramatic shift from the U.S., the Philippines’ sole mutual defense treaty ally and major trading partner, came in October 2016. The president made his first state visit to Beijing to proclaim his new policy to an audience of Chinese investors, and returned, triumphant, with $24 billion in pledges of investment and credit lines.

The four subsequent visits, including two this year, in April and August, brought the total amount of committed investments to around $45 billion, covering steel mills, industrial hubs, railways, bridges and power plants. Those projects, if delivered, would be an enormous boost to the Philippines’ $330 billion economy — and to Duterte, whose flagship economic policy is a $180 billion infrastructure drive, “Build, Build, Build.”

In 2015, before Duterte took office, actual Chinese foreign direct investment into the Philippines was just $570,000, according to the Philippine central bank. By last year, it had surged to nearly $200 million. Total trade between the two countries during the same period jumped from $17.65 billion to $30.83 billion in 2018, when China also beat Japan for the first time in decades as the largest importer of Philippine bananas, a major industry in Duterte’s home region of Davao in the south.

However, few of the headline infrastructure projects have actually broken ground. To date, only three projects — two bridges in Manila donated by the Chinese government, and an irrigation initiative in the northern Philippines — have actually begun construction. Some projects that had been pledged had later been found to be unfeasible, and canceled, according to the National Economic and Development Authority.

Business deals agreed in Beijing are stuck at the feasibility stage, or simply never materialized. A $700 million steel plant project between Baiyin International Investment and the Philippine miner Global Ferronickel Holdings, signed during Duterte’s 2016 visit to China, was later canceled. “The collapse in commodity prices made the Chinese partner hesitant to proceed,” Global Ferronickel President Dante Bravo told Nikkei.

The Philippines’ Foreign Affairs Secretary Teodoro Locsin Jr. aired his frustration over the stalled projects while in New York for the United Nations General Assembly in late September. “We signed up this and that agreement, but they hardly materialized,” Locsin said during an Asia Society event. “They hardly materialized, and if you were to compare it with Japanese investments and official assistance, nothing.”

Duterte’s political opposition has also highlighted fears that borrowing from China can lead countries into a “debt trap.” Vice President Leni Robredo has cautioned the administration over its reliance on Chinese loans, citing an incident in Sri Lanka, where the government was unable to pay back a loan to Beijing and was subsequently compelled to lease a strategically important port to a Chinese company.

“[The delays are] just fine with us”: Project hold-ups are down to rigorous due diligence on Chinese companies, Ernesto Pernia, Duterte’s secretary of socioeconomic planning, told the Nikkei Asian Review. (Photo by Kimberly dela Cruz)

Ernesto Pernia, Duterte’s secretary of socioeconomic planning, told Nikkei that the delays to the pledged projects were down to rigorous due diligence on Chinese companies.

“[The delays are] just fine with us, because we also want to be very careful with Chinese [official development assistance],” he said, adding that the government has set up a screening process, by which Beijing nominates at least three contractors for each project, and Manila chooses its preferred option. That system had been in place “even before this debt trap thing that has gotten other countries into trouble.”

Pernia, an economics professor who previously worked with the Asian Development Bank, argued that part of the issue is familiarity — the Philippines is “not as used to Chinese ODA as we are with other partners like Japan and Korea.”

Having diversified sources of funds is an advantage for the Philippines, especially as China and Japan compete for regional influence through aggressive infrastructure funding. In 2017, Japanese Prime Minister Shinzo Abe offered a 1 trillion yen ($9.35 billion) aid package for the Philippines, spread over five years.

“So they’re looking at a whole mixture of financing, and that’s a very smart strategy,” said Kelly Bird, country director for the Philippines at the Asian Development Bank. These sources, Bird added, are “not only to provide financing for them, but also to come with their own value-added innovations and technologies.”

Some of the delays are inevitably down to local issues. The Philippines has often struggled to absorb foreign investment due to tangled regulations and vested interests. Alvin Camba, a doctoral candidate at Johns Hopkins University who has studied Chinese investments across Southeast Asia, said that acquiring land is often a major barrier. The government moves slowly to secure rights, while local politicians meddle in order to extract concessions, such as train stations in their home district — something that slowed the progress of China-funded railway projects in Southern Luzon and Mindanao, according to Camba.

“Even non-Chinese investments get delayed by the same thing,” Camba said. “This is a function of our political economy. Land is really monopolized by the elites.”

The Philippines has also had bad experiences with Chinese-backed projects in the past. Under previous administrations, several deals ended in high-profile failures. In 2012, Beijing called off a $400 million loan for a railway project after the two countries engaged in a naval standoff over the Scarborough Shoal, a disputed reef in the South China Sea. A $329 million national broadband network project with the Chinese technology company ZTE was suspended due to alleged corruption, while in 2011, the World Bank banned China Communications Construction for five years over corrupt practices in a Philippine road project.

Protesters chant during a rally outside the Chinese Embassy in Manila in 2018.   © Reuters

Growing resistance

China seized the Scarborough Shoal in 2012, marking an escalation in a long-running dispute over territory in the South China Sea. Then-President Benigno Aquino took the dispute to an arbitration court in The Hague in 2013. The court ruled in Manila’s favor in July 2016, two weeks after Duterte took office; but during the arbitration process, the ruling of which China rejected, Beijing built seven artificial islands in the South China Sea. In June this year, tensions flared after a Chinese vessel rammed and sank a Philippine fishing boat, the Gem Ver, near Reed Bank, an area of the South China Sea within Manila’s exclusive economic zone.

That conflict looms large over Duterte’s China policy, and has placed the defense establishment — which Duterte has courted to help drive his often violent campaigns against drugs, crime, and his battle with communist and Islamist insurgents — at the forefront of the resistance against it.

Some in the military establishment fear that Chinese investments are a way to gain a strategic advantage in the disputed waters. Alexander Pama, a former navy chief who served in the Aquino government, is among those who have openly called for greater scrutiny of Beijing-led projects. “Their intention is very obvious. Just looking at the map will already raise an eyebrow,” Pama told Nikkei. “The strategic value [of their investments] is so evident that it’s expected that the defense establishment will voice its objection.”

“[China’s] intention is very obvious. Just looking at the map will already raise an eyebrow”

Alexander Pama, a former navy chief during the Aquino government

Grande Island, for example, is situated at the entrance of Subic Bay, which opens up into the South China Sea. Grande is only around 145 nautical miles away from Scarborough Shoal.

The situation has put Subic Bay Metropolitan Authority chair Eisma in a bind. As head of the naval-base-turned-economic-zone, her mandate is to attract investments, and the U.S.-China trade war should be creating opportunities, as Chinese companies look to move some of their operations offshore to dodge the tit-for-tat tariffs. However, the military’s apprehensions mean that she has to consider the strategic implications of potential investors.

Eisma has opened a direct line with the defense minister and head of the national intelligence agency to help her vet investors, but she insisted that the move is not aimed specifically at China.

“I don’t get formal instructions [from the military], but I am still trying to be very cautious, because I am not an expert in national security,” she said.

A less popular leader than Duterte might not be able to sustain the pivot toward China, meaning that there is an ever-approaching deadline to get projects underway, says one analyst.   © Reuters

It is not just the military that opposes China’s growing role in the Philippine economy. The general public is also far from supportive of Manila’s closeness to Beijing. After the sinking of the Gem Ver in June, Filipinos’ “net trust” in China deteriorated to -24%, according to pollster Social Weather Stations. By contrast, net trust of the U.S. is at 73%, while trust in Japan and Australia is at 45% and 46%, respectively.

Ground-level opposition is rising. Local heritage conservationists are opposing a China-sponsored “friendship” bridge linking Binondo — Chinatown — and Intramuros, a walled city that used to be the seat of the Spanish colonial government, on the grounds that the project will extend to the edge of the San Agustin Church, a UNESCO World Heritage site. Labor groups have also raised protests at the number of Chinese nationals employed in construction projects and restaurants, arguing that those are jobs locals can perform. “Suffice to say, the South China Sea incidents could have aggravated this perception,” IDSS’ Koh said.

Despite this opposition, the Duterte government has continued to back controversial projects. Shrugging off concerns over the potential for espionage, China Telecom is set to enter the Philippine market in a joint venture with a local company, Udenna, owned by a Duterte ally. The new network will even be allowed to install communications equipment on military bases, despite opposition from some lawmakers.

In August, Duterte and Chinese President Xi Jinping agreed to proceed with a joint oil and gas exploration initiative in the politically sensitive South China Sea. Manila said that it will own 60% in the venture, and that it will help to secure the country’s energy supplies for the future.

Benefit of the doubt

Duterte’s double-down on China in the face of public dissatisfaction is a departure for a president who has, to date, been almost preternaturally in tune with the population. Leaders in the Philippines have historically watched their popularity decline in the second half of their terms of office. Duterte’s approval ratings — fueled by nationalist and populist rhetoric, economic growth, and popular measures such as tax cuts for the working class and free tuition in state colleges — have only increased.

The president’s willingness to stand in opposition to the electorate on China is partly about hedging his bets. “The president wanted to diversify relations with other countries, and not only to one side — with [the] U.S., for example — to spread the risks,” Pernia said.

That is not just about money. For Koh, playing off geopolitical rivals against one another gives Duterte “a certain leverage to parry off Western and international criticism over contentious issues,” such as the drug war, which has left thousands of suspects dead, including minors.

Bob Herrera-Lim, managing director at risk consultancy Teneo, said Duterte will likely remain popular despite the delays in the China-funded projects. “The people will likely give him the benefit of the doubt until the end of his term, even if his promises have clearly fallen short by then,” Herrera-Lim said.

However, a less popular leader might not be able to sustain the pivot toward China, meaning that there is an ever-approaching deadline to get projects signed off and underway.

“The challenge right now for those projects still under negotiation is that they must reach implementation stage before the next administration takes over, otherwise there may be a risk of their terms being modified — or they may even be stopped,” Herrera-Lim said.

Yet, U-turns are already happening even while Duterte is still in power, and the Grande Island issue is an example of how shaky bilateral ties really are.

“The SBMA was very excited when we first presented the project because it will generate jobs. I’m not sure what went wrong,” Grande Island resort general manager David Du told Nikkei. “I can only surmise that we became a casualty of the territorial dispute in the South China Sea.”

Researcher Ella Hermonio in Manila contributed to this report.