The China pivot raises suspicions, but also hopes

THE government’s momentous pivot to China has upended diplomatic arrangements in the region and raised alarms about Beijing’s possible stranglehold on the Philippine economy, but a little-examined aspect of the shift has been the desirability of the economically-vibrant Philippines as a market and an investment destination, giving Manila more leverage than many realize, analysts said.

“Returns here are high. It just means we can pick and choose and China has been more aggressive,” said George N. Manzano, an economist with the University of Asia and the Pacific.

“China also has excess capacity in construction,” he added. Being active in the Philippines “means business for them. At the same time they provide something, which is an important part of China’s initiative.”

And while the fear of Chinese control over the economy has been welldocumented, one of the opportunities that seems to have arisen from the pivot is the possibility of pitting powerful regional economies against each other as they bid for economic and strategic influence.

“We have to be careful not to be overdependent on China,” he said. “Look into Japan and other countries.”

The China shift comes amid a perfect storm of a number of factors, which include the emergence of America-first policy in Washington, a Philippine President temperementally suspicious of the United States who has also made infrastructure the centerpiece of his program of government, a Beijing anxious to maintain economic growth and raise its standing in the world by pouring money into neighboring countries with a breathtakingly ambitious Silk Road initiative — and a Japan apparently concerned that its painstakingly-built influence in Southeast Asia might be subject to challenge.

That partly explains why Prime Minister Shinzo Abe made it a point in January to establish warm ties with President Rodrigo R. Duterte, going so far as paying a visit to Davao and breakfasting in the former Davao mayor’s house — a gesture that would be unthinkable coming from the imperial Chinese President Xi Jinping, the internationally aloof US President Donald J. Trump — or former President Barack Obama, for that matter.

The visit by Mr. Abe generated pledges of ¥1 trillion in aid, which happened to dovetail neatly with the Philippine government’s obsession with infrastructure, and specifically its inclination to fund the building program with internally-generated revenue and foreign loans.

“For the further development of the Philippines, we will create business opportunities through Official Development Assistance (ODA) and private sector investments which together will be of the order of ¥1 trillion over the next five years,” Mr. Abe said in the joint press statement issued during his visit.

Japan accounts for the secondlargest foreign direct investments in the Philippines, following the United States, with net investments more than doubling to $394.91 billion in 2015 from $117.50 billion in 2014, according to data from the Bangko Sentral ng Pilipinas.

Mr. Manzano said he welcomes the Japanese role in the economy as a “balancing” element to set against China

“We need to balance (China) by having an intensified relationship with Japan, or our ASEAN partners,” he said.

Indeed, suspicions of China’s greater designs are never far from the surface. Richard J. Heydarian, an associate political science professor at De La Salle University, notes that China’s modus operandi is to ensure it has “economic influence in smaller countries, (thereby gaining) international diplomatic support, in countries like Cambodia, Laos and Myanmar.”

The motives range from helping build infrastructure, “major naval access,” and influence over those countries’ economic policies, he said.

Mr. Heydarian said it is possible to have close economic ties with Beijing but remain independent. “Vietnam has extremely strong relations with China, (but) Vietnam is standing up to China,” he noted.

“The Duterte administration should welcome Chinese investment but make sure they are based on sustainable interest rates, not a debt trap,” he said, and also expressed the hope that “the military technology they bring in with does not weaken national security.”

Victor Andres H. Manhit, president of the Stratbase ADR Institute for Strategic and International Studies, concurred, noting that Philippine national interests could have been “compromised.”

“This administration’s pivot to China is a concern not because of its effects on our other international relationships, but because of how it may compromise our ability to successfully advocate for our interests in the West Philippine Sea. Our sovereignty and sovereign rights should not be traded away,” he said.

“China did not offer loans only out of the goodness of its heart, but in exchange for this new political relationship. Is this worth it? To be worth it, the administration must at least show that it does not have other avenues for funding our infrastructure projects. Second… these loans may prove to be a financial tool to extract political leverage, not only over this administration but future administrations that will honor such agreements.

The picture that emerges is of a Philippine government seemingly confident it can manage not only a regional bidding war, but also the mighty geopolitical forces swirling around the region, and in the bargain get some much-needed construction projects off the ground.

The government’s economic team, in particular, seems to view the risks from engaging China as manageable, while welcoming the increased access to Chinese markets and capital as desireable. In May, Budget Secretary Benjamin E. Diokno forcefully denied claims that Chinese assistance would send the national debt spiraling out of control.

“We expect the debt to GDP ratio to decline from 40% in 2015 to 35% in 2022. The article is based on the wrong assumption that our borrowing costs is between 10 to 15% and that GDP (the numerator in the ratio is constant),” he told BusinessWorld in mid-May. “Our borrowing costs will be in the neighborhood of 4%. Nominal GDP is likely to increase by nine to 10% annually,” he added. “Finally, we intend to have an 80:20 mix in favor of local borrowing; this is to minimize the foreign exchange risk of foreign financing of the deficit.”

How well Mr. Duterte pulls off this balancing act could well be the focus of the rest of his term in office. As Mr. Manzano puts it, “Rebalancing is really a play on words. We are not dissociating (with traditional allies). We are trying to rebalance and show that we have a choice of partners. Rebalancing, not to overly commit to only one. —