New China-Philippine Relations

As China continues to climb towards fiscal and political dominance, former allies of the declining United States are beginning to take note. Will the Philippines be the first of many to change teams or are they an anomaly?

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.

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.

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 combatting the violent separatist and terrorist movements that have plagued the country for years.

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.

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.

A short term fling?

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.While Duterte’s domestic popularity is high, 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.

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. 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.

Since its establishment in 1992, Dezan Shira & Associates has guided foreign clients through South China and Asia’s complex regulatory environment, assisting with legal, accounting, tax, internal control, HR, payroll and audit matters. As one of the most experienced and longest established practices in the Pearl River Delta with over 70 professionals well versed in practical China knowledge, we are your reliable partner for business expansion in this region and beyond.

To schedule a free consultation on how your business can benefit from the latest regulatory changes in South China and other regions, please contact Mr. Stephen O’Regan at +86 186 2007 3991, email us at dongguan@dezshira.com or visit www.dezshira.com

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