How PH is missing China’s soft rebound

During the six-year Duterte era, the ties with China were recalibrated from friction and conflict to peaceful cooperation. In the past year, that period faded away. The costs are evident, huge and rising.

ONE of the key assumptions of those policymakers who regard the plunge of Philippine bilateral ties with Beijing as a positive phenomenon is that China’s economy is “in a freefall.” Why build on bilateral ties with a dying dinosaur is their theme.

The problem is that the assumption is flawed. Worse, the costs of the plunging bilateral ties, which these policymakers describe as minimal to manageable, are high — as evidenced by bilateral trade, investment and tourism.

China’s brighter macroeconomic outlook

When Chinese Premier Li Qiang took the podium at the World Economic Forum in Davos, he said that in the fourth quarter of 2023, GDP growth amounted to 5.2 percent. That’s slightly better than the official target of around 5 percent. The Chinese economy is heading toward a soft rebound.

Retail sales grew by 7.4 percent in December from a year ago. Chinese consumers are gradually returning to the marketplace, but they remain cost-conscious. The impending Chinese New Year is likely to generate “9 billion passenger trips,” which will accelerate growth in retail, tourism and transportation.

There is significant pent-up demand in China, as evidenced by the above-trend deposits. The trick is to unleash that consumption power, and the first condition is a promising job market outlook. According to China’s National Bureau of Statistics, the unemployment rate in cities in December was 5.1 percent. Last summer, the unemployment rate for young people ages 16 to 24 soared to a record 21.3 percent. Now, it is at 14.9 percent — back where it was in January 2022.

Furthermore, industrial activities are picking up, with industrial production rising by 6.8 percent in December from a year earlier, thus beating forecasts. And the same goes for fixed asset investment, which increased by 3 percent in 2023, slightly above the predicted increase.

There is also broad expectation for targeted fiscal support. And in light of the elevated real interest rates, space remains for rate cuts. As the Fed is likely to enter the rate cut cycle later in 2024, China’s cuts will ensue.

And the long term? As Premier Li noted in Davos, China has some 400 million people in the middleincome group, and that number is expected to double to 800 million in the next decade. In the next decade, urbanization in China will create huge demand in sectors such as housing, education, medical and elderly care, especially as there are still nearly 300 million rural Chinese who will eventually migrate to cities — and a substantial opportunity to domestic and international actors.

However, as I warned almost a year ago (see my TMT column of March 27, 2023), the Philippines is missing out.

Double-digit falls in exports

What are the implications of China’s soft rebound from the Philippine perspective? Why should these matter from the standpoint of the policymakers in Manila? Let’s start with trade.

In the pre-pandemic Duterte era, Philippine exports to China were booming, and the future seemed even better. Had the status quo prevailed, exports to China would have increased with its soft rebound. But those days have faded. Worse, the fall is across the board, as evidenced by recent year-on-year data.

Exports from the Philippines

dropped 14 percent year on year to $6.1 billion in November 2023, cooling from a six-month low of an 18 percent decline in October. Sales were in double-digit fall for electronic products (-25 percent), especially office equipment (-35 percent), automotive electronics (-28 percent) and telecoms (-26 percent).

Shipments decreased for top trading partners, including Hong Kong (-38 percent), Taiwan (-16 percent) and China (-6 percent). From January to November, exports were 8.4 percent lower than the same period last year. Similarly, imports stalled from a year earlier to $10.8 billion in November 2023, following a 2.4 percent fall in October and a nine-month sequence of decline.

Fast entry into the Regional Comprehensive Economic Partnership (RCEP) might have alleviated the situation. Ex-president Duterte initiated the RCEP deal in September 2021, but the Senate ratified it only a year ago (TMT, Feb. 27, 2023). Without a timely ratification, the Philippines lost billions of dollars.

And the timing doesn’t help. Since last fall, infrastructure and other state investments have recorded solid growth in China. Beijing has also approved $137 billion in sovereign bond issuance. Infrastructure investments support imports like iron ore, crude oil and copper, which bodes well for commodity exporters to China — from countries that prioritize cooperation over conflict.