Sino-Filipino skirmishes in South China Sea undermine China-funded projects

In October 2023, the Philippines declared that it will no longer employ Chinese loans to fund three railway projects valued at more than US$5 billion and has begun talks with other Asian countries for alternative financing deals.

“We saw that China appeared to be no longer interested, so we’ll look for other partners,” Transportation Secretary Jaime Bautista said in an interview at his office in Manila at that time.

Under the administration of then President Rodrigo Duterte who promoted closer ties with Beijing, China agreed to bankroll three railway projects situated outside Manila. 

However, the government of Duterte’s successor Ferdinand Marcos Jr recalibrated the deals, owing to delays on the Chinese side in loan negotiations against the backdrop of escalating animosities in the disputed South China Sea. Weeks of tense clashes between Manila and Beijing in the disputed waterway a few instances of collisions, e.g., on October 22, among others. 

“We have three projects that won’t be funded by the Chinese government any more. We can’t wait forever, and it seems like China isn’t that interested anymore,” Bautista declared, sparking speculation that Manila would exit China’s Belt and Road Initiative (BRI).

The projects were part of the flagship infrastructure program of Duterte, whose pro-China stance saw him glossed over Manila’s maritime dispute with Beijing in exchange for loans and grants from China. 

One project was the 380-kilometer South Long Haul Railway, which will link Laguna province, south of the capital Manila, to Bicol, a province on the southernmost tip of the major Philippine island of Luzon.

A 71-kilometer railway will connect the Subic Bay Freeport Zone to the Clark Freeport Zone, while the third project is the first phase of a planned 100km railway connecting various provinces in Mindanao in the southern Philippines.

However, the government rebuffed speculation on November 16 that it was departing Beijing’s BRI.

The Department of Foreign Affairs maintained that the Philippines was still part of the global infrastructure scheme, and reinforced that a new memorandum of understanding on the BRI was signed during Marcos Jr’s state visit to China in January 2023.

Additionally, other ongoing infrastructure projects in the country are still being funded with Chinese official development assistance.

Ongoing maritime tensions between Beijing and Manila may have been the last straw for the three aforementioned railway projects, visiting senior fellow Aries Arugay of the ISEAS-Yusof Ishak Institute remarked in statements to The Straits Times.

Dr. Arugay pointed out that when Marcos assumed power in 2022, he had said Chinese agreements made under the Duterte government would be reviewed.

“While it is not good to wholly define Philippines-China relations on the South China Sea issue, Chinese behavior is making the Philippines define the relationship purely on geopolitical terms, even if the Marcos government initially doesn’t want to,” Dr. Arugay said. 

“Because how can you deal with a country that does (these things to us at sea) and continues to cooperate economically?” he said. “And let’s be objective: The terms of these deals needed to be renegotiated because they seem to be so unfair.”

Even under the Duterte administration, Philippine lawmakers had indicated problems in the fine print regarding the railway loan agreements with China.

Senate hearings on the railway projects in 2019 revealed that negotiations were delayed due to China’s loan-terms policy, under which a project must first have a contractor and a project management consultant before loan negotiations can start. 

The Mindanao Railway project, for instance, saw the Philippines requesting the shortlist of contractors from China in 2019. However, Beijing has not provided one to this day.

Philippine officials also voiced concerns over China’s higher interest rates compared with other funding sources, as well as Beijing’s tendency to push for confidentiality clauses in its loan assistance agreements.

“China’s grace period (before repayment begins) is shorter, with only five to seven years, compared with Japan with five to almost 10 years,” said Senator Win Gatchalian in October.

Chinese-funded infrastructure projects in the Philippines have long been plagued with issues like loan terms with high interest rates, local politics and right-of-way skirmishes. 

Moreover, the past few months has witnessed the Philippines making headlines with its approach of showcasing China’s pugilistic actions in the South China Sea, where Manila and Beijing have overlapping and conflicting claims.

Analysts and government officials said the Filipino campaign hopes to tackle the Chinese narrative and obtain more international backing for Manila’s claims in the controversial territorial dispute.

Under this strategy, the Filipino government has been constantly inviting journalists since mid-2023 to join the country’s resupply missions to a rickety World War 2-era warship that was grounded at Second Thomas Shoal in 1999 to act as a remote military outpost. 

The government also published footage of Chinese ships’ increasing presence in parts of the Spratly archipelago. Both Manila and Beijing claim the Second Thomas Shoal and the Spratlys. 

When a Chinese Coast Guard vessel employed a military-grade laser on its Philippine counterpart in February, the latter was prompt in publishing videos and photos of the incident. 

Although the Philippine government has no official name for this strategy, maritime security specialist Ray Powell of Stanford University’s Gordian Knot Centre for National Security Innovation portrayed it as an “assertive transparency” campaign. 

Powell said this strategy aimed to expose China’s “gray zone activities”, or assertive actions at sea that were not necessarily a declaration of war but could jeopardize another country’s national security.

“The gray zone is where everything is opaque and deniable, and you can’t really classify what’s going on, right? Is it legal or illegal? Is it peace or war?” said Powell.

“I think all of (what the Philippines is doing right now) is clarifying (things). So that’s the effect of the assertive transparency campaign – that it shines a light in the gray zone.”

As of the time of writing, the Philippines is contemplating offers from Japan, South Korea and India to finance the three stalled railway projects instead. That being said, Manila is still maintaining economic relations with Beijing, which remains the Philippines’ largest trading partner.

Nonetheless, amid rising bilateral tensions in the South China Sea, Assistant Professor Alvin Camba from the University of Denver’s Josef Korbel School of International Studies said it would eventually dampen all aspects of Philippines-China relations.

“When it comes to getting those loans versus giving up our claim in the West Philippine Sea, I don’t think there’s a way to balance it out. You just have to choose,” he said. Manila alludes to the part of the South China Sea that it claims as the West Philippine Sea.

“You just have to chart the way moving forward in this uncertain world,” he continued.

Photo credit: iStock/ grynold

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