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Philippines-China Relations: Interplay Between Domestic Politics and Globalization

Info: 11261 words (45 pages) Dissertation
Published: 10th Dec 2019

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Tags: International RelationsPolitics

INTRODUCTION

Entangled in the China-Philippines relations is the sensitive issue of the South China Sea, which has been a sticking point for decades, but has grown from bad to worse when the issue was internationalized by the Philippines during Benigno Aquino III’s term. However, additional elements, such as the role of the private sector and global factors, have played a moderating effect on the bilateral relations by decoupling the economic from the political relations.  The Philippines also signed up as a founding member of the China-led Asian Infrastructure Investment Bank (AIIB) despite the country’s troubled relationship with China over the disputed South China Sea Islands. This supports the truism that private sector is profit-driven, rather than politically-driven, and motivated by opportunities of the market such as that presented by the China in the early nineties, and more recently the ASEAN market. In addition, given the two economies are largely intertwined with the global economy, particularly as members of the global supply chain, Philippines-China relations are unavoidably affected by the forces of globalization.

EARLY BILATERAL RELATIONS

Formal diplomatic ties between the Philippines and China were established in June 1975 during the martial law era of Ferdinand Marcos, shortly after the US reestablishment of diplomatic relations with China in 1972.  Due to the dictatorship the diplomatic change was relatively swift and immediate.

The Philippines is a special case for China to deal with. In comparison with other countries in the region, the Philippines has been a staunch ally of the United States since the Second World War.  Relations with the US, its colonizer for almost 50 years (1898-1946), “rest on a wide and substantive social bases with solid political, economic, military and social bonds.”[1] The Filipinos are the second largest ethnic minority group in the US, after the Hispanics.  Active American influence in the 1950s and 1960s in the fields of education, institutional and organizational building promoting anti-communist policies and activities led to a pervasive distrust of the then communist China.

Under the Mutual Defense Agreement of 1954, the US has also provided a de-facto security umbrella for the Philippines that continues till today (this is similar to the security umbrella the US provides Japan under the Security Treaty Between the United States and Japan).

As the US also established diplomatic relations with the mainland in 1972, the main resistance to build closer relations with China in the Philippines came from Taiwan.  When the Communist Party took over the mainland in 1949, the Philippines maintained diplomatic ties with the exiled government in Taiwan as the legitimate representative of China.  Since then, because of the presence of US military alliance, which during the Cold War period was anchored on the anti-communist drive, the Kuomintang (KMT) of Taiwan, by extension, had been able to have substantial influence in the Philippines, particularly among the ethnic Chinese.  Under a Treaty of Amity signed in 1947, Taiwan was able to supervise and control all Chinese schools in the Philippines.[2]  Needless to say Taiwan focused strongly on anti-communism in these schools. Another institution Taiwan had strong influence on was the Federation of Filipino Chinese Chambers of Commerce, Inc., the main business organization of the Filipino Chinese established in 1954.  Up to the nineties, KMT made sure the Federation was led by the pro-Taiwan group.

Because of these factors and despite the Philippines being one of the early countries to establish formal diplomatic relations with China, which resulted in some friendly engagements and trade exchanges in favor of the Philippines[3], the perception of China as a communist and an underdeveloped country that posed a threat lingered.  During Corazon Aquino’s term (1986-1992), the Philippines even wavered on the One China Policy due to the economic benefits that Taiwan offered.[4]

Unfortunately, most of the projects that the Philippine government discussed with Taiwan were withdrawn at the end of Corazon Aquino’s term. The Philippines thus missed the opportunities presented by China’s rapid economic growth during the six-year period of her term.  As Lim puts it, “The Aquino government was so single-minded in seeking Taiwan economic support that it overlooked the phenomenal rise of China’s economy and therefore failed to utilize it as ‘benevolent stimulus’ to the Philippines’s economic growth.”[5]

By the early nineties, amidst the flurry of regional economic development, China’s economic growth could not be ignored.  The Philippine government, under Fidel Ramos who succeeded Corazon Aquino, focused on economic “developmental diplomacy” that aligned to a more practical approach toward China.[6] The “Balance of Trade” Policy was terminated which led to the increase of trade with China by almost ten times from 1992-1998.[7]  Overall, trade and investments increased significantly during this period, largely driven by the forces of globalization.[8]  The relation however was marred by China’s occupation of the Mischief Reefs in 1995.

Philippines China relations went on relatively quiet cruise control for the next few years as President Joseph Estrada, who succeeded Fidel Ramos, had a short-lived presidency. China, on the other hand, successfully joined the World Trade Organization (WTO) in 2001.  The role of China in the formation of the China-ASEAN Free Trade Agreement inaugurated its regional aspirations.  China’s ascent in the global stage unavoidably convinced the leaders of the Philippines, for the most part, to see the importance of maintaining the balance of power in the region and to seek to engage China even as they maintain the traditional alliance with the USA.

The brief history illustrates the early volatility of the Philippines-China bilateral relations.  With China’s more active undertakings in the region and the Philippines’s lack of a coherent China policy, the volatility became more pronounced in the coming two decades.

CHINA’S CHARM OFFENSIVE IN THE PHILIPPINES

The development of China in the last two decades has been more than phenomenal.  With its rising power, China tried to engage the Southeast Asia region in order to see the region integrated and friendly with China.  The Asian Economic Crisis in the late nineties provided China the opportunity to identify with the ASEAN nations and to demonstrate its ability and willingness to play a role in promoting stability in the region.[9]

In the 2000s, the Philippines became a major source of China’s newfound economic dynamism.  Specifically, during the Arroyo administration (2001-2010), unprecedented levels of Chinese investments and Official Development Assistance (ODA) entered the Philippines. Starting in 2002, economic partnerships and joint ventures developed rapidly in the diverse fields including the power, infrastructure, mining, and agriculture.  The Philippines was among three Southeast Asian countries with large reported China aid and investments projects reaching US$5.4 billion between 2002 and 2007 (Vietnam was $3.4 billion and Burma $3.1 billion).[10]  In 2004, China’s ODA represented 60% of the Philippine’s total ODA.[11]  Two of the largest projects, the Northrail Project and the NBN-ZTE Project, are highlighted below to illustrate China’s early charm initiatives in the Philippines.

Northrail Project

Reported to be China’s single biggest aid project in Southeast Asia at that time, the North Luzon Railway Project (“Northrail”) signed in 2004, was a major infrastructure project that was to build a commuter train service that could ferry 150,000 passengers a day between the capital and surrounding provinces. It was awarded to China National Machinery and Industry Corp. (later renamed to Sinomach) in 2003 for an initial US$431million, which was to be funded by China’s Export-Import Bank. It was reported to be the first 20-year concessionary loan ever extended by China to any government at 3 percent interest including a five-year grace period. It was followed by a second loan of US$500 million, which was signed but never used.[12]  After six years, not a single kilometer of rail was built.  The succeeding government halted and eventually cancelled the project.  China then demanded the repayment of the loan.

 

NBN-ZTE

Another major project to be financed by China was the National Broadband Network (NBN) project with Chinese state firm Zhong Xing Telecommunications Equipment (ZTE) Corporation. It was a US$330 million contract to be funded by the Export-Import Bank of China to build a national broadband network linking the national offices and barangay (village) municipal offices.  The contract was signed in April 2007, suspended by September 2007 and canceled by October 2007.

Under Arroyo’s term, the Philippines was poised to be an early beneficiary of China’s charm offensive with the entry of a deluge of mega-projects to be funded by China.  The funding of these projects included foreign direct investments (FDI) and ODA. Regardless of the classification, these major state-to-state projects were packaged in such concessional rates that according to a Philippine economic officer, the rates China extended were rates the Philippine government had had to negotiate from other funding countries, which added to its attractiveness.[13]

Despite China’s economic power and strategic diplomacy however, it had not been successful in getting the cooperation of the Philippines and in fact got into more troubles with all its efforts, partly because China underestimated the strength of domestic politics and the effect of China’s strong stance on territorial issue, which the Philippine side perceives as the flexing of the emerging state’s newfound power.  The Philippine domestic politics prevented the country from fully capitalizing on China’s altruism and economic charm offensive.

DOMESTIC POLITICS AND THE PHILIPPINES-CHINA RELATIONS

The domestic political landscape of the Philippines has been described as personality-based which leads to policy changes whenever a new president is elected—the Philippine president has a six-year term limit in office.  Change may also occur within an administration due to internal politics as in the case of relations with China during the Arroyo term.  Due to the lack of a coherent China, the personality-based politics and weak institutions have derailed or altogether canceled even the best laid plans. Ultimately, this has led to a roller coaster ride in the Philippines-China relationship—the manifestation seen in how relations went from a “Golden Age of Partnership” (Arroyo: 2000-2010), to no relationship (Aquino 2010-2016), and finally to friendly relations (Duterte 2016-2022).[14]

China Policy Formulation

The Philippines has traditionally been dependent on the West for much of what it needed in terms of political, economic, and security needs.  For example, the USA has provided the de-facto external security needs of the country under the 1951 Mutual Defense Treaty.  Economically, the USA and then Japan were the perennial top trading partners of the Philippines.  China was traditionally not a major trade partner of the Philippines, although this has changed in the past few years and China has since become the top trading partner in 2017.  American brands and media influence are ubiquitous in the Philippine market and demonstrate the extensive reach of America’s soft power.  For the most part the Philippines foreign policy remains tightly linked with the US. Wurfel (1990) believes the Philippines has not had a “full foreign policy restructuring” as a consequence of the US cultural and strategic colonial vestiges. Due to these factors, the Philippines has traditionally not had the sense of urgency to craft a strategic or a coherent China policy.

In extension, the Philippines, for the most part, unlike other countries that have established long-standing, even government-funded, research institutes or think tanks with whom the government can regularly consult has not seen the importance of establishing institutions that research or study China extensively.  Because of this, policy makers or architects of foreign policy lack the pool of resources provided by institutional memory or sinologists that understand China and all her complexities.

Partly as a consequence, the absence of a clear China policy has been responsible for the Philippines “missing the boat” or fully capitalizing on China’s economic growth since the nineties.  For example, the Philippines focused on its relationship with Taiwan in the early nineties just when China’s economy took off.  It initially did not sign on to the “Early Harvest Program” of the China-ASEAN Free Trade Area (FTA) in 2003, even though the nine other ASEAN members already did.[15]  Perhaps partly as a consequence, among the major ASEAN countries, the Philippines is the lowest in trade, tourism, and student exchanges with China.  It also almost missed being part of the One Belt One Road when the Philippines singly-focused on the territorial dispute and was the last to sign up as one of the founding members of the Asian Infrastructure Investment Bank. More importantly, whenever bumps or challenges in the bilateral relationship develop, management of the relations easily go askew—or worse, cascade into a crisis.

This is exactly what transpired in the 1995 Mischief Reef dispute. The Philippines was caught off guard when China suddenly occupied the area. In the 2012 Scarborough Shoal Incident, the Philippines was outmaneuvered by China and lost effective control of the area after the US-brokered negotiations did not materialize.[16]  Moreover, Manila could not prevent the political impasse from spilling over and adversely affecting the health of the economic relations between the two countries.[17] The events above reinforce the detrimental consequences of the lack of a consistent China policy.

Personality-based politics

In the absence of a firm strategic foreign policy, the foreign relations of a country can easily be dictated or altered with the change of leadership.  Personality-based politics in the shaping of foreign policy is concerned mainly with the divergent interests of leaders who shape or make policies—in the case of the Philippines, the president is the chief architect.  According to Mesquita, “the choice of foreign policy interactions is generally constrained to be incentive-compatible with the motivations of national leaders to maintain their hold on political power”.  Indeed, in the Philippine case, the absence of a firm China-policy has seen the incumbent president adopt the “China-card” based on his or her personal need or political expediency. This can best be demonstrated by how each president has singlehandedly altered the Philippine’s South China Sea position to suit his or her domestic necessities, as the examples below will illustrate.

Macapagal-Arroyo served nine years as president from 2001 to 2010. Her administration began to warm up to China when relations with the USA chilled after she pulled out the Philippines from then US President Bush’s “coalition of the willing” for the war in Iraq to save the life of an Overseas Filipino hostage.  The succeeding years would see Arroyo travel to China in an unprecedented eleven times and in the 30th anniversary of bilateral relations in 2005, both sides toasted to the “Golden Age of Partnership”.[18]  At this time, China became a major part of the Philippine’s foreign relations.

However, domestic challenges from local stakeholders to Arroyo’s legitimacy would continually overshadow her foreign policy.  From the start, her taking over the presidency from then Estrada was seen as an underhanded power-grab.  The maneuver also pitted her, who represented the society’s elites, against the poor masses (Estrada was seen as a the “president of the poor” and experienced a similar “coup” as Thailand’s Thaksin).  Upon winning her own election in 2004, she was mired for charges of election fraud which would hound her for the rest of her administration.

The perennial South China Sea issue was addressed during Arroyo’s term with the establishment of the Joint Maritime Seismic Understanding (JMSU), a tripartite agreement including the Philippines, China, and Vietnam signed by Arroyo in Manila on March 2005. The proponents contended that the agreement was scientific in nature with the aim of gathering pre-exploratory seismic data on possible oil reserves.  Initially the agreement was hailed as a breakthrough in dispute resolution.  However, it would soon be dragged into the political quagmire that hounded Arroyo’s term.  Opponents criticized the non-transparent way the negotiations were done and questioned the reasoning behind the trilateral approach when the South China Sea dispute involved more claimants.  In addition, critics questioned whether political concessions made under JMSU was a quid pro quo for China’s generous economic packages that were coming in the country and said to fund Arroyo’s development projects.  Political opponents further accused her of bartering away Philippine national security interests, eventually the clamor led to a full-blown Senate inquiry.  The deal was made to lapse in July 1, 2008, foregoing the option to extend the agreement to its second phase.

Aquino III (son of Corazon Aquino) took over the presidency in 2010 to 2016.  Branding his government as the anti-thesis of his predecessor— he had campaigned on an anti-corruption campaign—his administration indiscriminately halted or canceled almost all of the infrastructure projects signed by the previous administration.  He would later be criticized for arbitrarily canceling even projects that would have contributed to the much needed developmental needs of the Philippines.[19]

Despite this, Aquino’s initial overtures to China appeared to start off relations on a fresh start.  His first state visit was to China where the two leaders agreed to strengthen economic and trade cooperation while minimizing the impact of disputes in the South China Sea.[20] Aquino also sent his close friend and Interior Secretary to negotiate the repayment of the loans for the canceled Northrail Projects.  He even placed his international reputation at risk when he decided not to attend the 2010 Nobel Peace Prize ceremony in support of the Chinese government boycotting the event.  Manila also deported 14 Taiwanese online fraudsters to Beijing, amidst the protest of Taipei.  From the Philippine perspective, these efforts demonstrated Aquino’s early friendly overtures to China.

However, Philippines-China relations quickly went from bad to worse. At around the same time, Aquino faced early challenges in his presidency that were coincidentally directly or indirectly linked to the Philippines-China relations, for example the botched rescue operation to save a bus filled with Hong Kong tourists in Manila in 2010, the shooting of the Taiwanese fishermen by the Philippine Coast Guard in mid-2013, and the Chinese execution of Filipino drug-mules despite appeals for clemency by the Philippine President.[21]

Then the South China Sea issue erupted which inevitably cascaded into a crisis in relations when the highest level of communication was halted. The South China Sea disputes were at the center of relations.  He criticized Arroyo’s JMSU by saying it “shouldn’t have happened as it encroached into the country’s territorial waters ”.

The government of President Aquino decided to adopt a uni-dimensional approach to manage the relations.   The turning point was April 2012 Scarborough Shoal Incident that ended with China gaining effective control of the disputed area that caused the loss of confidence on both sides.  Consequently Philippines-China relations inevitably became less cordial, even hostile. Then the following year, the Aquino administration decided to unilaterally adopt a legal position on the dispute which led to the Philippines filing the historic case against China in the United Nations Permanent Court of Arbitration in 2013.  The last couple of years of Aquino’s presidency, bilateral relations went on a stand-still, even described to have reached the “lowest point”.[22]

The unanimous decision that awarded the arbitration case to the Philippines was made a few months after President Duterte assumed office, who replaced Aquino in mid-2016. Duterte decided to adopt a less hostile stand on the South China Sea issue and to adopt a multi-dimensional approach in its relations with China— demonstrating the contrasting approaches of the two presidents, but more importantly how the personal decisions of the leader can singlehandedly alter the country’s China foreign policy. [23]

One of Duterte’s domestic governance platforms was anchored on his “war on drugs”.  The USA government under the Obama Administration criticized Duterte for his human rights violations.  This led Duterte to question the longstanding alliance of the Philippines and the USA and announced his intention to craft an independent foreign policy which includes a pivot to China.[24]

Within a few months, he sent an informal but high-level delegation to Hong Kong led by former president Ramos. This “Track II” historical meeting was a significant inroad because it was the first high-level meeting between the two countries since high-level talks were called off under Aquino. This was followed by the first state visit by Duterte to Beijing and would visit China twice within the first year of his administration.  The state visit highlighted the renewed focus on the economic relations, and pledges made totaled US$24 billion.[25]  Within a couple of months, the Joint Commission on Economic and Trade Cooperation (JCETC), discontinued under Aquino, was reconvened to fast track the implementation process.

Some of the immediate developments brought about by the friendlier relationship initiated by Duterte starting in 2016 included the Chinese government lifting of the ban on the imports of Philippine tropical fruits such as bananas and pineapples followed by the purchase of US$1.5 billion worth of Philippine goods destined for China’s markets—the largest such deal China has made for an Asian country. The travel warning on the Philippines issued in 2014 by the Chinese was also lifted leading to increase in arrivals from about 490,000 in 2015 to 670,000 in 2016, on track to hit 1 million in 2017. The Filipino fishermen were able to return to their fishing activities in Scarborough Shoal only a few weeks after Duterte’s state visit, which China had made off-limits in the aftermath of the 2012 Scarborough Shoal Incident.

Public Perception of China

There is a widely shared public distrust of China among the Philippine populace, that also pervades among the government leaders and bureaucrats, which does not help the relations.  On one hand, the pervasive public perception that Chinese funded projects are low quality and prone to corruption and, on the other, the ongoing territorial dispute inevitably ties any economic engagements as somehow politically motivated.  Since scientific opinion polling began in the Philippines, the net-trust rating of China by Filipinos has been perennially the lowest among the traditional foreign partners of the Philippines—the US is the most trusted followed by Japan. [26]  Indeed, in spite of the increasing pledges China has promised to invest in the Philippines and the Philippine’s more amicable relations with China under President Duterte, survey results continue to show negative public perception of China (only better than North Korea).[27]  This is not surprising however as even before all these, the US-Taiwan influence on the Philippines has resulted in a zero-sum mentality approach towards China.

Further contributing to the negative public perception is the South China Sea territorial dispute and corruption issues that hound Chinese-funded projects, which vested interest groups and political oppositions also use to attack the seating president.

This negative perception may explain why even when political relations were good during Arroyo or Duterte, closer economic engagements are still slow in fruition or can altogether be derailed.  The domestic aversion for China-funded projects is evident when compared to other sources of foreign funding for instance Western, Japan or South Korea entities, which receives no such public scrutiny.  Closer economic relations with China is often portrayed as posing a political or security risk, especially vis-à-vis the issues connecting to the South China Sea dispute. In fact, Presidents Arroyo and Duterte friendlier positions toward China were even accused of being too easy on or even “selling out” to China.

The situation is exacerbated when political relations deteriorate as can be seen under President Aquino when applications of Chinese investments, both public and private, were not being processed.[28]

Institutions and Bureaucracy

Like most countries, the Philippine President is considered the chief architect of foreign policy. But unlike other countries with strong institutions that can provide some objectivity or continuity that transcends the limits of a presidential term, the Philippine bureaucracy is characterized by patronage politics, weak institutions, and rampant corruption which have had a cumulative effect on Philippines-China relations as well.

For instance, given the traditionally US-ideology-based foreign policy framework and the lack of resources for policy formulation coupled with the President’s “power of the purse”, in general the oversight powers of the legislative and judicial branches of government on the President’s foreign policy is weak or simply defers to the “presidential prerogative” in most cases.[29]  Moreover the appointing powers of the President including for the Department of Foreign Affairs and ambassadorial positions results in the lack of continuity and incentives to professionalize the service.  In addition, the rotational structure of the foreign affairs and international trade departments for Philippine diplomats and trade attachés, which places a 3-6 years term limit per posting, makes it difficult to establish deeper expertise and networks on any particular country.  Indeed, as Tuazon concludes, “The absence of a strategic and coherent foreign policy as well as a career –oriented, professional foreign affairs body allows informal power structures as well as vested interest of pressure groups to wield a stronger influence on foreign relations”.[30]

One manifestation of weak institutions, or perhaps an outcome of weak institutions is rampant corruption in the bureaucracy, which has played a debilitating effect on the country from fully capitalizing on its foreign relations in general, and with China, in particular.  Amidst allegations and controversies of corruption, even going all the way up to the highest officials in government, major projects meant to have been funded by China have been ultimately halted or canceled.

The initial excitement surrounding the Northrail Project deteriorated when reports surfaced that massive corruption permeated throughout the transactions.  Layers of contractors and subcontractors were used to create a labyrinth of signatories that doomed the project from the start.[31] Moreover President Macapagal-Arroyo’s weakened hold on power meant she was unable to defend the ongoing Northrail project which was subsequently passed on to the next administration.  Subsequently, upon taking office the new Aquino government froze the project in mid-2010 and eventually cancelled the project saying it is “an expensive project that became even more expensive after renegotiation… with fewer public benefits”.[32]  China then asked for the repayment of the loan that had already been released to the Philippines.[33]  Since this developed during the deterioration of political relations because of the South China Sea issue, China’s demand for repayment was seen as politically motivated.

The NBN-ZTE deal was another major casualty.  The contract was signed, suspended and canceled within six months by Arroyo due to the allegations that key people in her administration including her husband and elections chief received kickbacks of as much as 200 million pesos to guarantee the deal. Her political survival was placed in jeopardy when she was attacked by her predecessors, cabinet members, civil society, and even the military.  This resulted in a government directive in 2008 that halted official development assistance (ODA) and loans for eleven major projects with total worth of US$2.6 billion, half of which were meant to be funded by China.

Amidst the public clamor and growing opposition for a series of China-funded projects, Ms. Arroyo would eventually form a panel called the China Projects Oversight Panel (CPOP) to review all Chinese government-funded projects in the country and placed a moratorium on additional loan transfers and eventually suspended other projects in the pipeline to stave off the domestic pressure being mounted on her.  Her fate was sealed in the court of public opinion when the media reported on a photo of president Arroyo playing golf in Shenzhen with the Chinese businessmen connected to the NBN-ZTE deal.  In October 2007, she met with Chinese President Hu Jintao in Shanghai to explain her “difficult decision” to cancel the controversial ZTE deal and suspend other projects to be funded by China.[34]

Although the weaknesses of the Philippine domestic politics have prevented the country from fully benefiting from China’s economic overtures, there have been successful China-funded development projects.  One common pattern among these projects is they worked with established institutions and linked on the developmental objectives of the cooperation and delinked from the politics.  Some projects were even started under one president and completed under the successor, including the Agno River Integrated Irrigation Project (ARIIP), the Angat Water Utilization and Aqueduct Improvement Project, and the Philippine-Sino Center for Agricultural Technology (PhilSCAT)—projects that also finished several months ahead of schedule.  Most of these projects were coursed through the ministerial or organizational-level and somewhat smaller-scale (few million dollars compared to hundreds of millions of dollars).

The largest Chinese investment in the Philippines, the National Grid Corporation of the Philippines, is another illustrative case.  Although there are many aspects to the initial success, one factor stands out: it anchored on established institutions.

China State Grid

In 2007, State Grid of Corporation of China (also called China State Grid), a Chinese state-owned enterprise and the world’s biggest power company, won the 25-year contract (extendable to 50-years) to manage and operate the Philippines’ entire electricity grid in what was then the first overseas investment for the company.[35]

The deal was made with two local partners—Monte Oro Grid Resources Corporation led by port tycoon Enrique Razon, Jr., who would later enter the gaming industry and build the Philippines’ largest casino resort venture, and Calaca High Power Corporation of businessman Robert Coyuito, another tycoon.  The domestic players each own 30% while China’s State Grid owns the remaining 40%.[36] The consortium, established as National Grid Corporation of the Philippines (NGCP) In 2010, Henry Sy Jr. of the SM Group and the Philippines’ richest family bought out the 30% stake of Monte Oro Grid Resources.   The usual business model entails the international partner to provide financial and technical assistance to the local partner.

The choice of institutional Filipino names by the Chinese investors suggests this was part of the strategy to partner with established players.  It was initially dubbed as the country’s biggest government auction conducted in efforts to reform the local power sector.

Nonetheless it is not without its critics. The deal was criticized for the supposed non-transparent and biased conduct that surrounded the bidding.  In spite of the local opposition, even by some Philippine officials, a law was passed in 2008 that legalized the role of NGCP in the “franchise to operate, manage, and expand the electric transmission business of the country”.[37]  This further institutionalized the presence of China State Grid.

It must be noted that the successful auction came after four failed attempts since 2001 and was part of the Philippine government’s program to revive a troubled initiative to sell power generating and grid assets to settle over $7 billion in debts at the Philippines’ insolvent state power company.[38]  In addition the privatization was a product of the Philippine domestic law known as the Electric Power Industry Reform Act (EPIRA) of 2001.  Lastly, the company contends it won the contract through public competitive bidding, where other major local and foreign players had equally participated in.

Privatizing the state-owned utility was subsequently criticized as posing a grave national security threat under the administration of Aquino. This took place amidst the deteriorating political relationship of the two countries due to the South China Sea conflict post-2012.  In 2015, the Philippine government refused to grant the work visa extension to 18 Chinese technical experts.  The head of the Department of Energy acknowledged the decision not to extend the working visas stemmed from the uncertainty surrounding territorial dispute between the two countries.  However, he also acknowledged the government’s concern may be unfounded as other countries where China State Grid has invested like Europe, Australia, and Brazil have not posed such concerns.[39]

Philippine legislators continue to voice their concerns regarding the participation of a Chinese state-owned-enterprise in the Philippine’s national grid even under the Duterte administration, who has since established good relations with China.  Amidst reported profits, lawmakers have recently questioned the role of China State Grid and have proposed legislations to amend or rescind the Chinese ownership.[40] The plight of the National Grid Corporation of the Philippines is an unfolding story.  However, the initial achievements of the joint venture testify the successful partnerships may be had when the parties involved operate professionally and with established institutions of the host country.

GLOBAL TRENDS AND MARKET FORCES

The Philippines-China economic relations are unavoidably linked to global market force.  Despite unstable bilateral political relations, global economic developments provide a cushioning effect on the evolution of Philippines-China bilateral relations.

With the help of globalization, China has become completely integrated with the global economy and engages practically all countries in the world. In just a matter of decades after its Open Door Policy, China emerged from being a secluded, isolated, and self-reliant economy to one of the most globalized economies in the world.  In less than a generation, it has propelled itself to become the second largest economy and forecasted to overtake the United States by 2020.  It has been a prime driver of the world economy since the nineties. During the Asian financial crisis, in the late nineties, it demonstrated its economic resilience and capability, as well as its willingness to assist countries affected by the crisis. While also affected by the Global Financial Crisis (GFC), China prevented the crisis from deepening into a global recession. For instance, in the Philippines the decrease in exports to western markets were compensated by increase in exports to China during the 2007-2009 period.[41]

Conversely, China’s economic slowdown since early 2010 has caused a significant impact in the global economy.  For example, in the aftermath of the GFC, the weakening demand for raw commodity and fuel from China resulted in the global slump in prices for these items.

Traditionally, it was assumed that good political relations translated to good economic relations and bad political relations to bad economic relations. However, as can be seen, the forces of globalization and regionalization are changing the rules of the game. For instance, Philippine-China trade has continually been growing in spite of the health of the bilateral relations, only slowing or decreasing due to the effects of the global supply network, Global Financial Crisis, and “China’s new normal”.[42]

Beyond State-State Investments

For the most part, data shows when political diplomatic relations go awry, it is from the non-state-to-state engagements where investments continue.[43]  This is because non-state players are more concerned about their economic and social welfare than with political disagreements or the territorial dispute.[44]  Non-state-to-state commercial actors considered here include Chinese transnational corporations, private Chinese and Philippine corporations and entrepreneurs.

Playing a vital catalyst role in the trade and investments are the new migrants. Their growing presence is clearly felt in the retail business but has also been seen in real estate, mining and infrastructure. The role of the new migrants in the economic relations represents one of the significant yet unrecognized factors in globalization. In fact, as testament to their growing influence in the Philippine economy, during Ms. Arroyo’s time, the new migrants established their own business associations: “Migrant Chamber of Commerce and Industry” by the retailers in 2007, and the “Philippine Chinese Chamber of Commerce and Industry” by the larger enterprises in the same year. At that time, the government as well as the biggest and most active chamber of commerce, the Federation of Filipino Chinese Chambers of Commerce and Industry established by the old migrants in 1954, encouraged the new migrants to form their own organization.

The new migrants main purpose is to find opportunities and make money. Many of them initially establish themselves in the most low-profile manner in small-scale positions such as traders, retail merchants and small-scale miners. These entrepreneurs venture into far-flung provinces that traditional Filipino businessmen have shied away from thus providing them with less competition compared to the metropolis. Due to their aggressiveness, entrepreneurship, and connections to suppliers in China, they have been able to disrupt the traditional business models and experienced unprecedented growth in their investments. [45]

This has been a big boost for the Filipino retailers and consumers in the provinces because they no longer have to travel to Manila for goods. Some of these “provincial” new migrants have since thrived and diversified their businesses from retail and wholesale to property development and mall operation. Furthermore, global opportunities abound as business can be done with China as their source and market.

As bigger Chinese businesses, with excess resources or access to capital, look outside of China for opportunities, coupled with China’s Go-Global program announced in mid-2000s, the global presence of Chinese enterprises will continue.  Chinese-owned telecom companies Huawei and Fiberhome, for example, have established business operations in the Philippines as part of their global expansion even when political bilateral relations began to deteriorate, albeit in more low-key manner.  Bank of China in the Philippines has since expanded operations to better service the needs of the growing network of business both Chinese and Filipinos.[46]

In a 2014 Investment Forum in Beijing co-organized by the Philippine embassy with the China Overseas Federation, noted that a number of Chinese enterprises have decided to locate their operations in the Philippines as they “go global” to be “closer to the market either to mitigate foreign trade friction, and or to curb potential trade protectionism”.[47]  Evident here is when political bilateral relations are bad, the private sector picks up the slack as the states lessen their economic cooperation.  Moreover, in the countries where Chinese businesses venture, Chinese entrepreneurs follow to facilitate business transactions and often take residency in the host countries where they end up purchasing a condominium residence, renting an office, hiring local personnel and eventually immigrating—ultimately creating more dynamism in the host’s domestic economy.  This may partly explain why the real estate prices especially in Southeast Asia have continued to show strong growth.[48]

China and ASEAN Markets

Another group representing the private sector are the Filipino (ethnic and Chinese Filipinos) private companies and entrepreneurs who do cross-border business. Unlike in China where the biggest industry players are usually state-owned enterprises, the Philippines is largely dominated, if not monopolized, by private businesses. The latter group, especially those who linked with China’s burgeoning economy during the early years has benefited substantially from China. The Filipino conglomerates have also benefitted through the availability of cheaper manufactured and industrial goods as these have contributed to the lower cost of doing business in the home market.  For instance, players in the real estate, construction and infrastructure developments have exploited the record-low prices of steel, cement, aluminum, flat glass, and shipbuilding supplied by China’s excess-production as they have since been able to successfully bid for government projects as they have been able to significantly lower their costs or establish joint ventures with technical Chinese partners.[49]  For the more aggressive Filipino companies, the business opportunities have also expanded not only in the Philippines but across ASEAN, particularly with the entry of the Asean Economic Community in 2015.

Foreign diversification of Philippine firms is largely private led and has mostly taken place after 2010.[50] Filipino conglomerates decide to do business in China or ASEAN based on the opportunities to profit from the particular market, or as part of its regional strategy.  For example, one of the Philippine’s largest conglomerate, Ayala Group of Companies, invested in the electronics manufacturing and real estate business in China. The conglomerate’s latter business took advantage of the booming housing market in China’s second tier cities, but then divested its stake when the housing market matured and transferred its investment to ASEAN. The former business continues to manage the manufacturing sites and sales offices in the mainland to support its global supply chain. One of the most well-known snack-foods manufacturers in China is the Filipino-owned Oishi brand of the Liwayway Group of Companies. It has factories all over China that import managers and machineries from the Philippines. The Oishi was one of the first Filipino companies to venture into China in the early nineties when land and labor were very cheap. It went on to replicate the same model in Southeast Asian countries. The country’s biggest container port operator operates a port in Shandong China as part of its global network. The company then diversified into the hotel and gaming industry opening a casino complex in the Philippines to cater to the Chinese high-rollers.  These are just some of the examples of Filipino players finding their niche in this regional marketplace.

Only a handful of companies had invested early in China as part of their corporate strategy.  Noteworthy examples include San Miguel Corporation in beer (Guangzhou 1990), ETON in real estate properties (1993), Unilab in pharmaceutical (Shanghai 1995), SM Group in malls (Xiamen 2001), Ayala Group of Companies in real estate, as mentioned above (Tianjin 2010), and Metrobank in banking (Shanghai 2010). some of the oldest, biggest and most diversified Philippine conglomerates— and finally privately-held Liwayway Corporation, also mentioned above (Shanghai 1993).[51]

More recently, Filipino companies have skipped China altogether and focused on the ASEAN market instead. The early ASEAN diversifiers include Universal Robina Corporation and Zesto Corporation in snacks food and beverages manufacturing; Jollibee in the fast food chains; Unilab in pharmaceutical; Petron in oil refining; Philweb in online gambling; and Manila Water, Metro Pacific Manila Toll Roads, Manila Electric Company in utilities.

Some of the late entrants, like Zesto, attempted to penetrate the China market initially but exited when they found the barriers to entry insurmountable.[52]  The general perception is that the China market is too competitive and cut-throat, the government regulations are too difficult to manage, and growth prospects are slowing due to a maturing market.  In contrast, the ASEAN market provides a large market, geographic proximity, cultural similarities, and more favorable regulatory treatment as members of the bloc, and the favorable growth prospects of the region.  Although the developments are still preliminary, the momentum of the ASEAN Economic Community only provides additional impetus for additional players to invest in ASEAN.  Interestingly, the majority of publicly listed companies with new plans to diversify abroad have explicitly acknowledged the desire to establish a foothold in the emerging ASEAN market.[53]  Given the Philippine’s hundred million Filipinos with a fairly young demographic and educated workforce, and second largest population in ASEAN after Indonesia, the Philippines is seen as strategically situated to benefit from the regional integration. Based on these examples, it is evident that the movement of Philippine investors from China to ASEAN is motivated more by economic market diversification than bilateral political considerations.

China’s Global and Regional Charm Offensive

Contemporary developments signal China’s desire to take a more pronounced role in global and regional affairs. It initiated the One Belt One Road and Asian Infrastructure Bank to contribute to global infrastructure investments. It has also taken the driver’s seat in the Regional Comprehensive Economic Program (RCEP), first proposed in the 2012 ASEAN Summit in Cambodia, initially considered as the region’s response to the US-led Trans-Pacific Partnership (TPP), has since been infused with renewed dynamism ever since the TPP lost steam when Trump withdrew the US.

The One Belt One Road is China’s formal declaration of its intent to take a more active global role.  On the one hand, the critics warn that the OBOR carries geopolitical and security designs by China, on the other hand the program includes packages that align with the economic needs of the regional members, such as Asia’s need to fill its infrastructure development gap of an estimated US$26 trillion until 2030.[54]  However, from China’s perspective the OBOR is expected to develop China’s less developed provinces, find markets for excess capacity like steel, cement, aluminum and capital surplus and technical capabilities.  It also hopes to develop its industries by establishing standards in infrastructure and trade developments.[55]  For China, a more prosperous region and the establishment of industry standards will contribute to the development, and stability, of its domestic economy.

During the height of the territorial dispute which coincided which Xi Jinping’s first announcement of the OBOR in 2013, China seems to have sidelined the Philippines with observers pointing out that the early maps of the OBOR route issued by China bypassed the Philippines.

Under President Aquino, the Philippines was the last minute founding member of the Asian Infrastructure Investment Bank (AIIB). This took place after debates within the Aquino government whether it was prudent to join the AIIB amidst the political impasse of the South China Sea dispute and concerns regarding China’s geo-political ambitions. The decision to join suggests that although the Philippines was involved in territorial disputes with China in the South China Sea and even though the US and Japan opted out, the Philippines had also recognized China’s influence in the global economy.  In other words, the last minute decision to join suggests good economics can trump even bad politics.

A converging development is seen when the Philippines under Duterte has recalibrated its foreign policy towards closer economic relations with China. In addition, the Philippine membership in China-led Asia Infrastructure Investment Bank (AIIB) provides the Philippines an alternative source of financing for its infrastructure needs.  In 2016, the AIIB agreed to co-finance two projects in transportation and flood-control projects in the metropolis with ADB and World Bank, respectively— perhaps signaling the changing norms in global developmental financing.


[1] LPLSADDFULLFIRSTNAME Sheng, “China’s Economic Relations With ASEAN: Developments and Strategic Implications,” in ASEAN-China Economic Relations, ed. Saw Swee-Hock (Singapore: Institute of Southeast Asian Studies, 2017), 295-317.

[2] Up to 1975, the Chinese schools followed a bi-curricula system: the English curriculum of the Philippine education system, and the Chinese curriculum similar to that used in Taiwan.

[3] For instance, upon the normalization of diplomatic relations with China in 1975, then First Lady Imelda Marcos was able to secure from China concessional prices on much-needed oil exports to the Philippines. (The oil crisis and the end of trade agreement with the U.S. at that time prompted Marcos to explore markets with the socialist countries.)  In exchange the Philippines exported coconut oil, lumber, sugar, copper ore, and other metals to China.

[4] When Marcos was replaced by Cory Aquino, Taiwan offered many benefits to the new government.  Aside from economic exchanges, which were allowed under the memorandum with Taiwan for economic and cultural exchanges, the Taiwan government also invited top government officials to visit Taiwan in official capacity and publicized the visits, which violated the One-China Policy.  Diplomatic protests from Beijing prompted the Philippine Congress to raise the issue and to re-interpret the One-China Policy to allow more engagements with Taiwan.

[5] BPLS ADDFULLNAME Lim, The Political Economy of the Philippines-China RelationsDiscussion Paper NO. 99-16 (Philippine APEC Study Center Network, 1999), 291.

[6] G. RPLSADDFULLNAME Pattugalan,  “A Review of Philippine Foreign Policy Under the Ramos Administration,” Kasarinlan: Philippine Journal of Third World Studies 14, no.3 (1999). ADDPGNUMBERIFAPPROPRIATE

[7] Trade between the two countries was traditionally restricted by the “Balance of Trade” Policy adopted by the Philippines in order to prevent high deficit in its trade with China.

[8] The Philippines became a member of WTO in 1995, and China in 2001.

[9] The Chinese Government contributed to the IMF-led rescue package for Thailand and Indonesia. China also committed not to depreciate its currency so as not to cause further difficulties to the already disastrous crisis. (Chen J ADDFULLNAME. Foreign Policy of the New Taiwan: Pragmatic Diplomacy in Southeast Asia, 2002,161). what is this reference. It is not clear pls change to Chicago style

[10] The rise in Chinese aid money for the Philippines seemed to follow the same pattern of rising Chinese ODA and government supported investments in Southeast Asia during this time. The amount of Chinese aid money for Southeast Asia rose from only US$36 million in 2002 to US$6.7 billion by 2007. Globally, Chinese aid surged from only US$51 million in 2002 to US$25.1 billion five years later (R Landingin, “Chinese Foreign Aid goes Off-track in the Philippines” in The Reality of Aid Management Committee, ed. The Reality of Aid Report – South-South Development Cooperation: A Challenge to the Aid System? (Quezon City: Ibon Books, 2010) 87-94.

[11] Chinese loans and overseas development assistance (ODA) to the Philippines are considered together due to the fact that Chinese loans to the Philippines thus far have been concessional in nature. Concessional funding from China, often financed through the Export and Import Bank of China, include RMB Yuan and US Dollar denominations at 2 percent to 3 percent annual interest rate at 20 years maturity and inclusive of 5 years grace period.

[12] Landingin, Chinese Foreign Aid goes Off-track in the Philippines.

[13] Interview with National Economic Development Authority Officer, 2016.  This is supported in studies like John Cooper’s “China’s Foreign Aid and Investment Diplomacy” (p. 30) and by Benito Lim, professor of Chinese Studies at the Ateneo de Manila University, when he said: “China lends money without imposing condition on opening up markets or trade liberalization, which makes it an attractive alternative to loans from the WB, ADB and most Western lenders.”

[14] As of the writing, the term of President Duterte is only on its first year.

[15] China Embassy. “Is the Early Harvest Good for RP?” 2004. http://ph.china-embassy.org/eng/sgdt/t171568.htm.INCLUDEANACCESSDATE

[16] S ADDFULLNAME Greiten, The US-Philippine Alliance in Year of Transition: Challenges & Opportunities, (Brookings Working Paper, 2016).

[17] For instance, it was unable to address Beijing’s travel advisory of Chinese tourists to the Philippines issued on two occasions and an importation ban placed on Philippine bananas.  In response, the Philippine immigration made it difficult or refused to renew the working visas of volunteer Mandarin teachers and Chinese technical experts who were assisting Filipino organizations.  Investments and tourism numbers fluctuated due to the deterioration of good will and confidence on both sides.  In comparison, Japan and Taiwan continue to receive several millions of Chinese investments and tourists annually, and vice versa, despite their countries ongoing political challenges with China.

[18] In 2005, in celebration of the 35th anniversary of the establishment of bilateral relations, the presidents of the Philippines and China toasted to the “Golden Year of Partnership” to usher in the friendly relationship that was unfolding.

[20] The two sides had pledged to double trade volumes to US$60 billion in five years, a six-fold rise from 2010.  In addition, Aquino came back triumphantly announcing nearly $13 billion worth of actual and planned Chinese investments in the Philippines.

[21] The unfortunate incidents were wholly unrelated to the South China Sea dispute, but more domestic security lapses that unfortunately involved the lives of people, in this case of Chinese citizens.

[22] A PLS ADDFULLNAME Baviera, The Influence of Domestic Politics on Philippine Foreign Policy: The Case of Philippines-China Relations Since 2004 (RSIS Working Paper No. 241, 2012), 2.

[23] As of this writing, the Duterte government is still in its early years so it is difficult to make any conclusive analysis. However, the study includes Duterte as it at provides examples on how the Philippine President can single-handedly alter the Philippine’s China Policy.

[24] One of China’s early overtures to the new administration was the donation of funds for the construction of rehabilitation centers to address the growing number of drug-users arrested.  In addition, China also signified its intention to contribute to the new government’s aim of fast-tracking infrastructure investments in the whole country.  Duterte’s China pivot is part of a broader shift as he has also reached out to Japan, ASEAN, and Russia to help the Philippine diversify its foreign partners. Since the Philippine economy is dependent on dollar earnings from the overseas Filipino workers in the US and outsourcing operations of American companies, the victory of Donald Trump, forecasted to lead to more US protectionist policies, and how it will affect the Philippine economy became a concern.

[25] US$15 billion worth of investment included railways, ports, infrastructure, flood-control, transportation, mining energy, telecommunication, real estate and agricultural projects; and US$9 billion in the form of soft loans including a $3 billion credit line with the Bank of China.

[26] Mahar Mangahas, “Trust in the US versus China,” Philippine Inquirer, October 22, 2016. http://opinion.inquirer.net/98411/trust-in-the-us-versus-china.

[27] Mahar Mangahas, “Filipinos Don’t Pivot” Philippine Inquirer. May 27, 2017. http://opinion.inquirer.net/104326/filipinos-dont-pivot.

[28] Interview.  Knowledgeable sources who wish to remain anonymous.

[29] Tuazon (2014). P. 8. THIS ONE IS NOT IN YOU BIBLIOGRAPHY PLS ADD AND CHANGE NOTE TO CHICAGO STYLE

[30] Ibid.

[31] Interview Mr. Franics Chua, 2015.

[32] President Aquino’s Third State of the Nation Address. July 23, 2012.

[33] TJ Burgonio, “China duns PH for $500 M for NorthRail loan,” Inquirer, September 26, 2012. http://globalnation.inquirer.net/51282/china-duns-ph-for-500-m-for-northrail-loan.

[34] “Arroyo stops deal with ZTE…” GMA News October 2, 2007. http://www.gmanetwork.com/news/news/nation/62860/arroyo-stops-deal-with-zte-china-prexy-accepts-decision/story/

[35] The company is reported to control 80 percent of the China’s power transmission assets. It generates more revenue than Apple Inc. and Boeing Co. combined. (Paton 2016).

[36] The 40-60 rule is a provision in the Philippine Constitution for foreign ownership of selected industries, including the power industry.

[37] Republic Act No. 9511 states “An Act Granting the National Grid Corporation of the Philippines a Franchise to Engage in the Business of Conveying or Transmitting Electricity through High Voltage Backbone System of Interconnected Transmission Lines, Substations and Related Facilities, and for Other Purposes”.

[38] R Landingin and R McGregor, “China State Grid group wins Philippine auction” 2007 http://www.ft.com/cms/s/0/f385a5d6a88d11dcad9e0000779fd2ac.html. *link not working

[39]  ShunsukeTabeta, “China power giant gobbling up foreign players,” Nikkei Asian Review, January 25, 2017.  http://asia.nikkei.com/Business/Companies/China-power-giant-gobbling-up-foreign-players.

[40] Aberon Palaña, “Lawmakers wants NGCP back in Filipino hands,” Manila Times, March 8, 2017. http://www.manilatimes.net/lawmaker-wants-ngcp-back-filipino-hands/316081/.

[41] E PLEASE ADDFULLNAME Palanca, Presentation in the APPFI Forum held at the University of the Philippines, August 15. 2016 and APPFI Forum at the University of the Philippines (2016 August 16).

[42] Ibid.

[43] Data shows the number of Chinese locators in the Philippines special economic zones actually increased even during the political tensions under the term of President Aquino (2010-2016). Source: Palanca, Presentation in the APPFI Forum held at the University of the Philippines.

[44] T PLS ADD FULL NAME Ang See “Migration Trends and their Socio-Economic Implications: The Ethnic Chinese Community,” Presentation in the Asia Pacific Pathways for Progress Foundation Forum titled “In Search of a China Strategy: Unpacking the Bilateral and Regional Dynamics of Philippine-China Relations,” August 15, 2016.

[45] Interview, 2014 to 2015.

[46] Interview with Mr. Deng Jun PLS ADD DATE.

[47] “Ph Investment Forum co-organised with China Overseas Investment Federation,” Philippine Embassy News 2014, IFYOUCANADDACCESSDATE.

[48] “Strong growth in SEA real estate markets to support ASEAN economic integration by 2015,” JLL, 4 June, 2013. http://www.jll.com/news/154/strong-growth-in-southeast-asian-real-estate-markets-to-support-asean-economic-integration-by-2015.

[49] Interview with Mr. Deng Jun. NEEDS DATE

[50] RPLSADDFULLNAME Rodriguez and BPLSADDFULLNAME Sandoval, “Foreign Diversification of Philippine Firms”. Philippine Management Review 2016 23, (2016): 17-23.

[51] “Exploring the Middle Kingdom,” Inquirer, October 6, 2016, http://business.inquirer.net/216779/exploring-the-middle-kingdom.

[52] Interview with Mr. Alfredo Yao ADD DATE.

[53] RPLSADDFULLNAME Rodriguez and BPLSADDFULLNAME Sandoval, “Foreign Diversification of Philippine Firms.”

[54] J PLSADDFULLNAME Endo, “Asia needs $26tn for infrastructure through 2030: ADB report,” Nikkei Asian Review, February 28, 2017.

https://asia.nikkei.com/Politics-Economy/Economy/Asia-needs-26tn-for-infrastructure-through-2030-ADB-report

[55] Peter Cai, Understanding China’s Belt and Road Initiative (Lowy Institute for International Politics, 2017). https://www.lowyinstitute.org/sites/default/files/documents/Understanding%20China%E2%80%99s%20Belt%20and%20Road%20Initiative_WEB_1.pdf.

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