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Beware China’s loans to Manila

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A general view of traffic in Manila’s financial district. NOEL CELISI/AFP

Beware China’s loans to Manila

(Philippine Daily Inquirer/ANN): In order to finance its ambitious “Build, build, build” program, the Philippines would need the infusion of massive foreign loans. In the past, the country depended on the World Bank, the International Monetary Fund and other Western financial institutions. Now the main source of loans is China.

In his first visit to China in 2016, President Rodrigo Duterte signed a cooperation agreement with Chinese President Xi Jinping, with Beijing pledging to provide funding for 30 projects in the Philippines worth billions of dollars.

As part of the agreement, China has earmarked $82.4 million for the Chico River Dam Project. Beijing has also pledged to fund two Philippine railway projects with a combined cost of $8.3 billion, and 30 smaller projects valued at $3.7 billion.

While Chinese loans appear to be attractive, they are not, in reality, that benevolent, and could be harmful to the country in the long term.

These loans are 1,100 per cent more expensive than the ones from Japan. They come with an interest rate of 2 to 3 per cent, while loans from Japan have interest rates between 0.25 and 0.75 per cent, or 12 times cheaper than those from China.

However, Socioeconomic Planning Secretary Ernesto M Pernia said the Philippines cannot get all the loans it needs from Japan. “Between 2 per cent and 3 per cent interest rate is still much better than commercial loans,” he said.

But here’s the caveat: China has a pattern of funding infrastructure projects in poorer countries in exchange for better relations and regional access, a trend called debt-trap diplomacy.

One of the vehicles for this strategy is China’s Belt and Road Initiative, a trillion-dollar project to link 70 countries in Asia, Oceania, Africa and Europe with railway lines and shipping lanes.

To fund the infrastructure projects, which are attractive to poorer and underdeveloped countries that struggle to secure traditional financing like the Philippines, China offers huge loans that have higher interest rates. In return, natural resources are used as collateral, which China can then control if a country defaults on its repayments.

China’s loans can also come with other strings. In the Philippines, Chinese-owned contractors will be required to work on the infrastructure projects, rather than supporting local firms and workers.

A cautionary example: Last year, with more than $1 billion in debt to China, Sri Lanka handed over a port to companies owned by the Chinese government.

According to the Washington-based Center for Global Development (CGD), a nonprofit research organisation, nations participating in the current Belt and Road investment plan that will default in their loan repayments will eventually find themselves at the mercy of Beijing. It said eight nations are now vulnerable to above-average debt: Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan.

The CGD said some countries are not waiting for China to take action against them. Pakistan and Nepal turned down Chinese infrastructure loans last year in favour of other sources of funding.

Writing for Asean Today, Oliver Ward warned that entering into a debt bondage with China for large amounts is a risky move for the Philippines.

“With such severe financial leverage over the Philippines, China could use it to its advantage to strengthen its situation over claims in the South China Sea. The loan could be utilized as a valuable weapon to erode Philippine sovereignty and the conditions of the loan used as a useful negotiating weapon to further Chinese territorial interests in the region,” said Ward.

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