Beware China’s loans to Manila
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 bet- ter relations and regional access, a trend called debttrap 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.