[OPINION] What scares me the most about China’s new, ‘friendly’ loans

JC Punongbayan

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[OPINION] What scares me the most about China’s new, ‘friendly’ loans
China is appropriating our territories even without any of its infrastructure projects breaking ground. It’s like a bank foreclosing your house even if it hasn’t given you any money yet.

 In a recent meeting of businessmen, socioeconomic planning Secretary Ernesto Pernia admitted that China’s infrastructure loans are more expensive than Japan’s.

Yet when asked why the Duterte government still wants to borrow huge loans from China, Pernia offered various answers like, “we cannot get all the loans” from Japan, the processing of Japanese projects tends to be “slow”, and China’s rates are “still much better” than commercial loans. Most notably, he said we need “more friends”.

But is China really being friendly here? In this article we show that China’s new loans to the Philippines are more sinister and onerous than they appear.

In recent years, China – in a strategy now known as “debt-trap diplomacy” –has lent billions of dollars to many poor countries worldwide, ostensibly to help finance their infrastructure projects. 

But many of these countries, once unable to pay, are forced to give up their natural resources and strategic assets as a form of collateral. This, in turn, promotes China’s economic and political interests worldwide.

We should heed the experiences of these other borrower countries. Given the actions – rather, inaction – of our current leadership, the Philippines could well be the next victim of this devious scheme. 

Expensive loans

By the end of Duterte’s first visit to Beijing in 2016, Chinese officials pledged $6 billion in foreign aid and $3 billion in loans, ostensibly to help finance Duterte’s flagship infrastructure project called “Build, Build, Build”. This is the very first time China is offering us foreign aid. 

Until now, China has not lent us any money. But Duterte’s chief economist confirmed talks are underway, and China is offering loans with 2-3% interest. Japan, in contrast, is offering us loans with 0.25 to 0.75% interest.

In economics, the price of a loan is its interest rate. Thus, simple math tells us that China’s loans are at least 3 times more expensive than Japan’s, and at most 12 times more expensive!

Some say the Chinese loans are expensive because they lend to risky states with low investment grade (that is, a high probability of default). 

But the Philippines attained investment grade status back in 2013, and credit rating agencies have improved and reaffirmed it since. If we’re so creditworthy, why can’t they offer lower rates like Japan?

Aside from the exorbitant rates, China’s loans also require the direct participation of Chinese contractors (unlike Japan’s loans, wherein anyone can bid).

So far, 3 infra projects have been prioritized for Chinese loan funding, namely: the Chico River Pump Irrigation Project, the New Centennial Water Source-Kaliwa Dam Project, and the North-South Railway Project-South Line. 

Which Chinese companies will get which projects? Pernia said the Philippine government would “select” among 3 Chinese companies, and gave assurances that they would be screened thoroughly.

But this is fertile ground for collusion and corruption. As warned by Supreme Court Associate Justice Antonio Carpio, the Chinese firms can simply talk and assign among themselves who will get the irrigation project, the dam project, and the railway project. 

We also have a bad past in dealing with Chinese firms for infrastructure projects. During the Arroyo administration, the $329-million NBN-ZTE deal left such a massive trail of corruption that led all the way to the first couple and resulted in graft charges against then president Gloria Macapagal Arroyo. 

The Northrail project was similarly botched due to bribery and overpricing charges. Had our obligation not been settled in 2017, we would have paid the Chinese contractor upwards of $100 million. 

In sum, China’s new loans are expensive, uncompetitive, and corruption-prone. 

Are Filipinos willing to pay such onerous loans, despite the availability of cheaper ones? Can the government assure that future dealings with Chinese firms will be devoid of scandal and corruption?

Debt-trap diplomacy

More importantly, the new loans offered by China must be understood in the context of China’s broader, long-term development strategy called the “Belt and Road Initiative” or BRI.

Under the BRI, China aims to build infrastructure projects – roads, bridges, ports, airports, pipelines, dams, railways, and telecommunications – across 68 countries in Asia-Pacific, Africa, Middle East, and Europe. (For an overview, see this graph prepared by Reuters.)

CHINESE ASSISTANCE. A map of the Belt and Road Initiative. Source: Reuters.

BRI projects are often offered as China’s way to help poor countries needing money to finance their own infrastructure and development projects.

From 2000 to 2015, for example, Chinese loans to poor Sub-Saharan African countries grew by a whopping 98 times, peaking in 2013 at $17 billion. Chinese banks also recently lent $1.2 billion to Pakistan, on top of a $57-billion pledge for the China-Pakistan Economic Corridor.

One expert said these large loans are “so big and appealing and revolutionary that many small countries find it difficult to resist.” Our very own finance department has endorsed BRI, saying it’s a chance to “open new markets for Philippine products” and fast-track the planned infrastructure “golden age.”

But in recent years, many poor countries have found themselves unable to pay these loans and, hence, are ensnared by China’s “debt trap”. As a form of payment, they are often left no choice but to give China unprecedented access to their natural resources or strategic assets – often at the cost of their own security and sovereignty. 

This strategy of China – known as “debt-trap diplomacy” – has victimized many poor countries in the past decade. China deepens its economic and political leverage worldwide as poor debtor countries suffer economic hardships. 

Examples abound:

  • In February, China sent 11 warships in the East Indian Ocean as a constitutional crisis raged in the Maldives, which owes China at least $2 billion in loans. China and India are vying for influence over the island chain.
  • Last December, Sri Lanka was forced to give China a 99-year lease on its strategic Hambantota port after failing to pay its debts. The port city of Mombasa in Kenya could suffer the same fate, after China funded a $3.8-billion railway there.
  • In 2017, Djibouti allowed the construction of China’s first overseas military base, on top of paying China $20 million per year for its outstanding debt. 
  • Venezuela, now in the midst of economic crisis, also borrowed $63 billion from China between 2007 and 2014, and China insisted that Venezuela repay it with oil. 
  • Turkmenistan has also given China access to its natural gas supplies after encountering similar debt troubles. 

It seems, therefore, that part of China’s debt-trap diplomacy is to use as collateral a poor debtor country’s natural resources and strategic assets. 

West Philippine Sea as collateral?

To anyone knowing China’s BRI and debt-trap diplomacy, President Rodrigo Duterte’s kowtowing to China looks deeply disturbing.

In particular, his soft stance in the West Philippine Sea (WPS) dispute can be read as his way of collateralizing our territories and resources there, in exchange for a few billion dollars worth of economic benefits from China.

Duterte has been openly indifferent about China’s intrusions in the WPS. Recently, he even joked about the possibility of the Philippines being a province of China. Spokesperson Harry Roque also said we might one day “thank” the Chinese for the islands they reclaimed.

Such acquiescence has real consequences. China is now fencing some of our most important resources in the WPS, including Reed Bank, which we direly need to supplant the fast-depleting gas reserves of Malampaya. 

If we cannot access Reed Bank in 8 to 10 years’ time, our energy supply in Luzon will be cut off, and we can expect rotating blackouts reminiscent of the 1990s. 

Obviously, Duterte’s dealings with China are far from fair exchange. As succinctly put by professor Jay Batongbacal, an expert on our maritime issues, “We are trading away too much, too early, and too soon in dealing with China.” 

Even supposing that an exchange is warranted, China is appropriating our territories even without any of its infrastructure projects breaking ground. It’s like a bank foreclosing your house even if it hasn’t given you any money yet.

A new form of colonialism? 

In economics, the cost of something is what you give up to get it. 

When it comes to China’s new loans, their cost comprises not just their high interest rates, but also the other things we seem to be giving up for them – including our territories, our natural resources, and our very own sovereignty. 

Government officials say we need these loans to make more friends. But what a costly friendship this is! 

Some actually call China’s debt-trap diplomacy a form of “neocolonialism” or “creditor imperialism.” 

Other countries, like the United States and the United Kingdom, are, of course, guilty of similar charges throughout history. But does this justify, in any way, China’s present militarization in the WPS and the inaction of the Duterte government?

Very soon, if Duterte continues to kowtow to China and hide from our people China’s ulterior motives, we might find ourselves waking up to our new Chinese overlords. 

Already, members of the Communist Party of China were invited as guests of honor in the PDP-Laban’s 36th anniversary party last February 27. Chinese President Xi Jinping’s new book was also launched there.

We fear Duterte’s dictatorial tendencies, yet something more sinister could be at play: he and his party could be betraying our nation by selling out our national interests and resources – hook, line, and sinker. 

The natural next question is, what’s in it for them? – Rappler.com 


Thanks to Kevin Mandrilla for valuable comments and suggestions.

The author is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter: @jcpunongbayan.

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for Rappler.com. He is also co-founder of UsapangEcon.com and co-host of Usapang Econ Podcast.