China’s folly: Why US$30 billion is not enough to buy the Philippines

Beijing is pouring billions of dollars into infrastructure and development projects in Malaysia and the Philippines. Their money may be good but are their intentions?

By Victoria Wah, edited by Francesca Ross

China is using billions of dollars of investment to buy new friends in Malaysia and the Philippines and distract from tensions over the South China Sea.

The deals on the table include poverty-reduction projects in the Philippines worth US$3.7 billion. This is an addition to a loan of US$24 billion to strengthen infrastructure. Chinese investments in the country have soared from US$23.27million in 2015 to US$480 million in 2016.

Beijing’s investments in Malaysia have more than doubled from US$3.25 billion in 2014 to US$8.95 billion in 2016. Chinese representatives have also signed fourteen deals for Malaysian projects worth US$33 million. This includes funding for the construction of Malaysia’s East Coast Rail Line (ECRL) and the Melaka Gateway Port.

Sources: Philippines Board of Investments, National Economic and Development Authority and American Enterprise Institute

China uses its cheque book to pacify its neighbours in the South China Sea

The strategy of using economics to smooth political tensions is already paying off. Malaysia has been less vocal than its ASEAN counter parts over the territorial dispute in the South China Sea. This is because China was Malaysia’s top foreign direct investment source, argued Ibrahim Suffian, the program director with Kuala Lumpur polling group Merdeka Center.

The people of the Philippines will be more difficult to win over. A Pulse Asia survey found that only 39% of Filipinos trusted China, while 76% trusted the US. Around 88% of Filipinos agreed that the Philippines should assert its right to the South China, or West Philippine Sea. It seems Beijing’s US$30 billion of investment has not warmed the country’s hearts to China’s aggressive diplomacy.

Randolph David, a sociology professor from the University of the Philippines, pointed out that a financial scandal regarding China’s North Rail project to connect Manila to the neighbouring province of Bulacan during the administration of Duterte’s predecessor Gloria Macapagal Arroyo, had reinforced the view that “you cannot trust the Chinese”.

China’s cheque book diplomacy will have only limited success

Overall, the tilt by both Malaysia and the Philippines towards China was “still more of a perception than a reality” concluded Bonnie Glaser, a China expert at the Center for Strategic and International Studies in Washington. Beijing’s deals are effective in forging economic goodwill, she explained. However, the line stops there. In short, cheque book diplomacy will go so far but China needs to back this up by building trust and soft power.

For example, although Malaysian politicians are not publicly attacking China’s foreign policy moves, they remain cautious about Beijing’s intentions. Defence Minister Hishammuddin Hussein has said publicly that Malaysia was firmly against the scaling up of military capacity in the South China Sea.

China’s AIIB project can benefit China and the ASEAN nations

China’s trump card in this push for regional influence is the Asian Infrastructure Investment Bank (AIIB). Beijing holds over a quarter of overall shares with 30%, and over a quarter of the voting rights.

The bank’s systems need the approval of at least 75% of votes to make changes on important issues like changes in capital base and the make-up of the board of directors. This means this one nation can individually exercise an effective veto on decisions that have the approval by all other member nations.

China has said it will not use this power. AIIB President Jin Liqun explained, “There are still many countries on the waiting list, and when the new members join, China’s voting power will be reduced. Such de facto veto power will be lost gradually.”

“This is the process of China gaining credibility and building up mutual trust by collective consultation and making decisions on democratic approaches,” he added.

The influence of the AIIB is growing and its impact will be seen across the region

Additional member countries are set to join the bank in 2017. This shows the international community is open to China’s offer to strengthen economic and trade ties. The bank has been an effective trust-building project and expanding the reach of development projects to make the most of this soft power could advance China’s interests.

Liqun continued, “In just six months, we have put the fundamentals of a large, modern multilateral financial institution in place, and have made significant progress.” He said loans already approved would fund nine heavyweight infrastructure projects that would improve connectivity in eight countries.

Money is the beginning of China’s new diplomatic efforts but the end goal is uncertain

The people of the Philippines will not easily relinquish their claims over the South China Sea, despite taking China’s economic lifelines. There is too much history, both ancient and modern, between the two nations.

There are also reasonable concerns that the promised investments will never become a reality. Indonesia was offered cash for a high-speed rail line but the money was never handed over. Some people in diplomatic circles are worried that AIIB deals may go the same way.

However, if Beijing follows through, the investment bank project could solidify international confidence in China. Financial support is opening diplomatic doors for China’s government; the question is where will these openings lead.