Rising Anxiety About China’s ‘Debt Trap’ in the Philippines

Over the past few months, rising scrutiny on Chinese investments in countries ranging from the Maldives to Malaysia has intensified an ongoing conversation in the Philippines about the risks of a Chinese “debt trap” in the country as the government of President Rodrigo Duterte pursues increased engagement with Beijing. This discussion has become more pronounced, with opposition emerging among the legislature and sections of the wider public.

While the Philippines is no stranger to its leaders periodically seeking to pursue better ties with China, the issue at play in Manila is the extent to which the Duterte government is doing enough to protect the Philippines’ interests and exercising proper caution in dealing with Beijing as it builds out its approach.

In a prominent recent example, leftist senatorial candidate Neri Colmenares questioned the high interest rates and other “unfair conditions” in the $69 million Chinese loan for an irrigation project that the government signed in 2018. He cited section 8.1 of the agreement, particularly the “Waiver of Immunity,” which states that the Philippines “irrevocably waives any immunity” of its patrimonial assets and assets that are for commercial use.

“The main issue here is that the Philippine government has allowed China to dictate the terms of these loans,” Colmenares said.

Responding to Colmenares, the president’s spokesman accused the candidate of desperately seeking media attention. But the president’s office failed to directly address the issue at hand, which garnered more interest regarding the details of the contract and other projects sponsored by China. The Philippine Daily Inquirer published an editorial demanding clarification from agencies involved in securing the loan. It also asked about the provision allowing the use of China’s laws to settle disputes.

“What were the economic managers thinking in the first place when they acquiesced to have the contract carry such a patently lopsided provision in favor of China?” the editorial fumed.

There are other issues as well. Some experts have argued, for example, that Japan and other countries offered lower interest rates yet the government insisted on sticking with its decision to acquire loans from Chinese banks. This again intensifies suspicions that the government is more interested in furthering its own policies even it if comes at the expense of Philippine interests.

It did not help the government’s case that during the March visit of Malaysian Prime Minister Mahathir Mohamad to the Philippines, he mentioned the “Chinese debt trap” and how this could undermine the sovereignty and long-term economic prospects of the country.

Mahathir’s words were widely covered across the Philippine media and led the government to state that it was taking his advice to heart. His words added more credence to the growing suspicion about the “generous” conditional loans dangled by China to the Duterte administration. This also came amid other developments, including news reports featuring the influx of Chinese workers to local construction projects contracted by Chinese-owned companies.

The rising attention to a potential “debt trap” has provided fuel for critics of Duterte during a midterm election year. Critics have used the “debt trap” issue to point to the broader limitations of Duterte’s approach to China and his foreign policy more generally.

A case in point is Senator Leila de Lima, an opposition politician currently in detention and a fierce critic of Duterte. “We cannot remain blind to this creeping Chinese invasion and its gradual take-over of the sectors of our economy that are vital to our national security and sovereignty,” de Lima said in a press statement.

Despite these criticisms, the government is standing its ground and continues to defend its dependence on China to fund the president’s key infrastructure projects. But such a defense has gotten the government into trouble at times. For instance, when a water shortage affected several cities of Metro Manila, the finance secretary was quick to argue that the construction of a dam being proposed by China could solve the problem. He was immediately criticized for invoking the water crisis to justify granting another huge infrastructure project to China.

More fundamentally, Duterte supporters continue to fixate on China as an alternative to the West to make their case for deeper engagement with Beijing, which misses the real issue. As was noted above, local concerns about a debt trap are rooted less in who the partner is, but rather what the terms for partnership are and whether the Philippine government is actually securing Manila’s interests to the best extent possible.

The rising debt trap anxiety in the Philippines with respect to China shows little sign of going away anytime soon. Indeed, it is becoming clear that the Duterte government needs to take urgent action to recalibrate its approach to Beijing and its messaging regarding deals with China. That means at the very least showing a willingness to review existing contracts signed with China where concerns exist and fixing loopholes that can severely weaken the country’s sovereignty. Otherwise, these lopsided deals could haunt Duterte and his party in the future, with opposition cohering into more extreme scenarios, including a basis to file an impeachment complaint in Congress.