Over the past few years, China has dominated the South China Sea disputes and, subsequently, secured the acquiescence of most other claimant states. Now, it has fixed its gaze on gaining a foothold in strategic locations and sectors of those claimants, a strategy that—in a nod to its layered paramilitary strategy—could be called its “economic cabbage strategy”.
From Malaysia to Maldives, China has sought to dominate critical infrastructure across sea lines of communications, gradually building a global network of access and dependencies, often at the expense of smaller nations’ sovereignty.
Under this approach, Chinese companies—most of them state-affiliated if not state-owned enterprises—zero in on prized infrastructure projects in critical sectors like electricity, telecommunications, police surveillance projects, and, most recently, major port facilities.
The blossoming Philippines-China relationship has opened a floodgate of Chinese investments, unnerving domestic players including the influential military establishment. In particular, China’s bid for a 300-hectares shipping yard in Subic Bay, the former site of one of the United States’ largest overseas naval bases, has unleashed a political firestorm, exposing the fragility of the ongoing rapprochement and the resilience of Beijing-skeptic sentiments in the Southeast Asian country.
The Maritime Silk Road
After failing to repay up to $1.3 billion in debt, the Philippine subsidiary of South Korean shipbuilding giant Hanjin Heavy Industries and Construction sought the assistance of the Philippine government.
At the height of its operations, Hanjin Philippines employed close to 10,000 workers, but its production levels dramatically decreased in recent years, largely due to financial difficulties and competition from China. Nevertheless, there are still close to 3,000 jobs at stake, putting pressure on the local government to find new investors and bail out the troubled company.
In January, a senior government official revealed that at least two Chinese companies, one state-affiliated, are bidding for the shipbuilding facility, which is the fifth largest in the world. The government, however, has refused to reveal the exact identity of the bidders.
Ostensibly, China’s interest in taking over the operation of the strategic port facility is part of its broader Maritime Silk Road Initiative, which thanks to improving bilateral relations now extends to the Philippines. During President Xi Jinping’s visit to Manila last November, the two countries signed a series of strategic agreements, among them a pledge for greater cooperation under the Belt and Road Initiative (BRI).
Since the BRI’s launch earlier this decade, Chinese companies have embarked on a “going global” strategy, taking over the operation and construction of more than 40 ports in 34 countries. From Piraeus in Greece to Gwadar in Pakistan and Darwin in Australia, Chinese logistics companies have placed themselves in some of the most strategically located ports across global sea lines of communications.
Two companies in particular, namely China Merchants Group and China Ocean Shipping Company, have spearheaded these global acquisition efforts. It’s likely that at least one of them is behind the Hanjin Philippines bid.
Chinese companies have also been active in penetrating the Philippines’ other strategic sectors. The state-affiliated China Telecom, for instance, is set to enter the country’s heavily protected telecommunications sector.
The State Grid Corporation of China, meanwhile, already has a 40 percent stake in the Philippines’ national grid. Huawei and other major Chinese surveillance companies have also been bidding for major surveillance and telecommunications projects.
A Chinese takeover in Subic, thus, would increase Beijing’s already outsized presence in the Philippines’ basic infrastructure, a trend that has sparked worries across the Philippines. Chinese companies have already embarked on an aggressive effort to establish a foothold in the emerging industries of nearby New Clark City, the former site of the major U.S. airbase complementing Subic Bay.
Echoes of Hambantota
What makes the prospective Chinese takeover of the Hanjin facility in Subic so sensitive is the issue of timing and location.
Firstly, it comes amid a global wave of suspicion toward Chinese investments and, more broadly, the BRI. In particular, many in the Philippines are worried about replicating Sri Lanka’s case, where state-affiliated China Harbor Engineering Company secured a controversial 99-year-lease on Hambantota port as part of a debt-for-equity arrangement.
It also comes amid Philippine president Rodrigo Duterte’s increasingly ineffectual efforts to improve bilateral relations with China, downplaying territorial disputes in the South China Sea in hopes of landing large investments.
Festering corruption and authoritarian policies under the Duterte administration have only deepened fears of China coopting the Filipino elite, at the expense of national security, sovereignty, and good governance reforms.
Furthermore, Subic Bay, where Hanjin shipyard is located, lies just 50 miles northwest of Manila and just over 100 nautical miles away from the hotly disputed Scarborough Shoal. It has state-of-the-art deep-water port facilities, which have in the past catered to large vessels and warships, especially from traditional allies such as the United States.
Though the United States no longer has a naval base at Subic, its warships regularly visit and conduct joint exercises in the area. Under the previous administration of Benigno Aquino, Manila initially considered granting Washington the right to regularly utilize bases in the area under a “rotational access” regime.
Under the Enhanced Defense Cooperation Agreement (EDCA), U.S. forces would also be permitted to pre-position weapons in the area and at other critical Philippine bases, serving as a form of deterrence against external threats, particularly China. Duterte, however, has sought to water down the plan and to downgrade bilateral security cooperation.
Nevertheless, the Subic area continues to be a focus of the annual Philippine-US Balikatan exercises, which include war games simulating joint operations against a potential adversary in the South China Sea. Recent years have seen expanded participation by other key strategic partners, especially Japan and Australia, which have recently stepped up their deployment of warships to Subic Bay.
The prospect of Chinese takeover of a major shipyard in the area has alarmed observers outside the Philippines as well. Those traditional partners, like the United States, Australia, and Japan, are also unnerved by the prospect of surveillance, espionage, and other security threats stemming from Chinese ownership of the facility.
In a sign of resistance from the traditional quarters, the Philippine defense establishment has openly opposed the move, instead suggesting the Philippine Navy take over the Hanjin facility for domestic warship production. A senior defense official told the author they are open to private sector assistance from “anyone but China”. Amid a multi-billion-dollar military modernization program, the Philippines is seriously considering developing its indigenous warship production capacity.
The government is currently looking at a $1.6 billion rescue plan drafted by the Department of Finance with direct input from the military and security agencies. They are looking at forming a consortium that includes domestic and non-Chinese foreign investors to finance and operate the large port facility with dual military-civilian purpose, the author learned from top sources. The stakes couldn’t be higher, and the move surely reflects the enduring unease over growing Chinese investments in the Philippines and across the region.