China-Philippine Relations: Implications for Foreign Investment

  • October 25, 2016

As Philippine president Rodrigo Duterte wraps up his controversial state visit to China, his string of inflammatory comments has continued and intensified, drawing concerns from foreign investors throughout emerging Asia. Known for his crude insults directed at world leaders and comparing himself to Adolf Hitler in his drive to eliminate drug dealers and users from the country, Duterte is now raising eyebrows for his explicit rejection of the U.S. – historically the Philippines’ most important ally – in favor of China’s rising might.

During his visit to China, Duterte categorically denounced the Philippines’ longstanding partnership with the U.S. “I announce my separation from the United States, both in military but economics also,” he stated. Meanwhile, Duterte fully embraced his East Asian hosts, saying that “The only hope of the Philippines economically, I’ll be frank with you, is China,” and calling the visit “the defining moment of my presidency.” These overtures stand in remarkable contrast to the frosty relations between the two countries earlier this year when The Hague ruled against China’s vast claims to the South China Sea, which is contested between China, the Philippines, and other Southeast Asian nations, leading China’s Defense Minister to call for preparations for a “people’s war at sea.” Duterte’s stunning pivot is emblematic of China’s rapidly expanding political and economic influence – and also of its potential to destabilize the region.

China’s allure

Under the rule of previous president Benigno Aquino III, the Philippines emerged as one of Asia’s fastest growing economies, growing at an average rate of 6.2 percent. However, a feeling that the fruits of the country’s growth were not shared with the average Filipino helped fuel anti-establishment sentiments towards the political and economic elite, thereby sweeping Duterte into office. The Philippines’ impressive growth during Aquino’s presidency came in spite of tense relations with China. In response to the Aquino regime’s filing of an official complaint to The Hague regarding China’s incursions in the South China Sea, the Chinese government discouraged trade and investment with the Philippines and slapped a travel advisory on the country to steer away tourists. Despite the cold relationship with China, the Philippines managed to maintain steady growth through macroeconomic reforms and a growing consumption class.

Duterte, however, is placing greater importance on China’s role in developing the Philippines’ economy, courting the Middle Kingdom for low interest loans, infrastructural development, and greater access to its consumer market. With several hundred influential businesspeople in tow for his visit, Duterte oversaw the signing of 13 bilateral agreements with China and US$13.5 billion worth of deals between the countries. Beijing committed over US$9 billion in low interest loans, including US$15 million for drug rehabilitation programs in support of Duterte’s aggressive anti-drug campaign. In addition to deals on energy and infrastructure, China promised to import more Philippine fruit and lift the travel advisory on the country, claiming that Chinese tourists will inject US$1 billion of revenue by the end of 2017. Other potential deals include a possible US$700 million investment in the Philippines by state-owned steel firm Baiyin Nonferrous Group Co. and up to US$3 billion by China Railway Group Ltd.

Impact on the U.S.

Despite Duterte’s colorful rebukes of the U.S., strong relations with the country are essential to sustain growth. The U.S. and the Philippines had more than US$18 billion in trade in 2015, and American companies have invested over US$4.7 billion in the Southeast Asian nation. Although Duterte disparages the American military’s presence, its capabilities are instrumental in combating the violent separatist and terrorist movements that have plagued the country for years. However, Duterte’s unpredictable policies, both at home and abroad, cast considerable uncertainty for foreign investors concerned about political instability and anti-American sentiment.

On the other hand, the Philippines’ pivot could deepen and accelerate the U.S.’s emerging alliances with other countries wary of China’s rise, such as Vietnam. Although China’s growing influence is at the crux of the Philippines’ jettison of the U.S., Sino-U.S. relations will likely remain stable as China prioritizes strengthening its domestic economy and takes the opportunity to appear as a responsible international actor. However, instances of longstanding alliances recalibrating could accelerate in the future as China flexes its financial muscle, particularly as is expressed in infrastructure development and low interest loans through the Asian Infrastructure Investment Bank and the One Belt, One Road policy.

A short term fling?

Although Duterte’s comments appear combative and emotional, his foreign policy is more likely than not a pragmatic strategy, even if it may not end up beneficial for the Philippines. Duterte may be gambling that he can increase Chinese trade and investment while ultimately still benefiting from the American security blanket. While he called to halt joint military exercises with the U.S. and expel them from their Philippine bases, Duterte has still upheld the U.S. as a treaty-bound ally. Indeed, Duterte memorably exclaimed that he would jet ski to contested islands and personally plant a Philippine flag if China violated the Philippines’ sovereignty, displaying his awareness of the country’s wariness over Chinese influence. However, the force with which he has moved away from the U.S. and towards China may end up creating uncertainty and instability rather than acting as a balancing act between two global powers.

Additionally, domestic factors may impede Duterte’s embrace of China. While Duterte’s domestic popularity is high, as noted by the Diplomat, it is not noticeably higher than that of previous Filipino presidents at the same point of their respective mandates. In fact, Duterte won a slightly smaller percentage of the popular vote during the 2016 Philippine presidential election (39 percent) than his predecessor did in 2010 (42 percent). The U.S. remains extremely popular in the Philippines, with 92 percent having “very favorable” or “somewhat favorable” views of America in 2015. In contrast, 51 percent had “little trust” and 19 percent were “undecided” in connection with China in June of this year. If the rejection of the U.S. in favor of China damages the economy, which has held a 6.9 percent growth rate in the first half of 2016, support for Duterte could quickly collapse.

Further, his support for extrajudicial killings, while popular in some corners, has raised concerns among elements of the political elite and the wider population. An ill-advised pivot towards China could raise strong opposition from the American-friendly military, and the nationalism Duterte has been stoking against the U.S. could easily be manifested towards China instead. While Duterte’s bold shift reflects China’s growing presence on the world stage, it may in the end be a blip in the Philippines’ foreign policy rather than a permanent switch. In the meantime, however, the situation highlights the potential for geopolitical maneuvering to impact foreign investment in what is an increasingly dynamic and unpredictable region.

This article was first published October 2016.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

For inquiries, please email us at .(JavaScript must be enabled to view this email address). Further information about our firm can be found at: www.dezshira.com