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Frequently Asked Questions (FAQs): Recent Developments in Philippines-China Relations

(Note: An earlier version of this FAQ misstated the official position of Malaysian leader Mahathir Mohamad. It is Prime Minister, not President. A revision is issued below for this correction.)

President Xi Jinping’s upcoming two-day state visit to the Philippines is expected to focus on finalizing the agreements on Chinese financing for key infrastructure projects and the framework for the proposed joint exploration agreement in the West Philippine Sea. The following frequently asked questions (FAQ) explain further the implications of these recent developments in Philippines-China relations:

Q: What is the Belt and Road Initiative (BRI) and its source of funding?

The Belt and Road Initiative “一带一路” , abbreviated as BRI (in most English translation) , B&R (official translation of the Chinese government), and formerly OBOR, is a systematic framework proposed by Xi in 2013 that focuses on development, connectivity, and cooperation. It consists of two primary components connecting Asia, Europe, and Africa through overland corridors based on the ancient Silk Road and 21st-century maritime shipping lanes.  The action plan released in March 2015 identified BRI’s five major cooperation priorities: policy coordination, facilities connectivity, unimpeded trade, financial integration, and people-to-people bonds. In essence, the BRI with its connectivity projects is a web of bilateral agreements with China functioning as its center.

The BRI is expected to cost more than USD1 trillion though there are varying estimates. Funding for the projects receive support from international multilateral banks (World Bank, Asian Development Bank [ADB], and Asian Investment and Infrastructure Bank [AIIB]), China’s state-owned banks, China Development Bank and the Export-Import Bank of China, and commercial banks. Other sources of funding are provided by a special Silk Road Fund that was established in 2014, state-owned enterprises both administered by the central and local government, and a strong representation of private enterprises.

The scale of BRI is unclear because of its ‘continuous evolution’ with new addenda (i.e. Polar Silk Road and Space Silk Road), thus making the economic and strategic implications also difficult to ascertain. In 2017 alone, the Philippines signed “13 bilateral cooperation agreements and USD24-billion worth of Chinese funding and investment was pledged” but these were not explicitly acknowledge as BRI projects. It is important to note, however, that “participation in the BRI is not a prerequisite for doing related business with China, nor is participation a guarantee of more business”.

Q: How much of the ‘Build, Build, Build’ is being funded by the BRI?

It is easy to link up the “Build, Build, Build” program with the BRI given the convergence of the infrastructure-based economic program of President Rodrigo Duterte’s administration and the emphasis (but not sole focus) on infrastructure of the BRI. Between June 2016 and February 2018, data from the National Economic Development Authority (NEDA) shows five approved projects with China, one with the AIIB together with the World Bank, and another that is partially funded by China. These are all infrastructure projects with total project costs of more than P70 Billion.

Whether any of these national infrastructure projects are part of the BRI is not clear. This is due to the nature of the BRI where projects are proposed by partner countries to China and, if approved, are sourced from any of the identified banks and institutions which provide funding for BRI projects. What complicates matters is that these same institutions may also finance projects which are not connected to the BRI.

In this context, the approved projects listed by NEDA indicate that they are part of “Build, Build, Build” but not necessarily of the BRI. Even as one might refer to them within the overall context of Chinese investments in the Philippines, majority of the national infrastructure projects are still being funded by more traditional sources of foreign investments such as Japan, the Asian Development Bank, and Korea. At this point, the promised USD24 billion in investments from China have yet to make a significant contribution to both the “Build, Build, Build” and to the entirety of the Duterte administration’s economic development program.

Q: What concerns have been raised with the influx of Chinese investments in the Philippines?

The increase in the preference for Chinese loans have fueled speculations that the Philippines is at risk of falling into a debt trap, as most loans from China also come with higher interest rates compared to other development funding assistance initiatives. Another concern has to do with debt-for-equity, a form of debt restructuring in which key assets of the same value are acquired in lieu of overdue balances. This has been the case in Sri Lanka where its government entered a 99-year lease with China for the Hambantota Port in exchange for reducing USD1-billion worth of accumulated debt. Prime Minister Mahathir Mohamad of Malaysia had recently cancelled two major infrastructure projects that are also part of the BRI, citing fears of increasing its current debt to China.

For its part, the Philippine government has allayed concerns and claimed to be exercising caution and continuously diversifying its funding sources despite plans to secure further Chinese support particularly for most of the key infrastructure development projects under ‘Build, Build, Build’.

Among the projects currently implemented with funding support from China include the Chico River Pump Irrigation Project, in which about 85 percent of the total project cost (equivalent to P3.135 billion) is covered by a loan agreement with China payable within 20 years with a 2 percent annual interest. The Metro Manila Flood Management Project will source USD207.6 million of the USD500 million project cost from the AIIB.

The memoranda of agreement or contracts for a number of programs and projects for official development assistance are expected to be signed during Xi’s state visit. This includes the North-South Railway Project (NSRP)-South Line (Long Haul); the New Centennial Water Source-Kaliwa Dam Project; and the conduct of feasibility studies for the Subic-Clark Railway Project and the Davao City Expressway Project.

Q: What is the status regarding the proposed joint exploration agreement in the West Philippine Sea? 

Currently, the Philippines and China lack a formal agreement regarding joint development in the West Philippine Sea. However, the leaders of both countries have already given their “go signal” to craft a bilateral framework for joint exploration in the West Philippine Sea in April. A series of meetings between Chinese and Philippine government officials have taken place as well as the establishment of a technical working group by the Duterte administration. Chinese Foreign Minister Wang Yi and Philippine Secretary of Foreign Affairs Teodoro Locsin Jr. also met in October in Davao City which included in the agenda talks of joint exploration.

A major challenge that this proposed framework is likely to face in the Philippines is legal in nature—particularly on the constitutionality of the arrangements being planned. Based on the 1987 Philippine Constitution, the “exploration, development, and utilization of natural resources shall be under the full control and supervision of the [Philippine] State.” In this regard, efforts towards the finalization of a joint exploration agreement requires addressing other confounding issues, such as questions of sovereignty and implications of the Hague ruling on the disputed territories.

The Strategic Studies Program of the University of the Philippines Center for Integrative and Development Studies (UP CIDS) aims to promote interest and discourse on significant changes in Philippine foreign policy and develop capacity building for strategic studies in the country. It views the Philippines’ latest engagement with the great powers and multilateral cooperation with other states in the Asia-Pacific region as a catalyst to further collaborative and multi-disciplinary research between the intellectual communities within East Asia.

For more information, contact [email protected] or (02) 981 8500 loc. 4266-68.

(Graphics by Ace Vincent Molo, UP CIDS Publications Unit)