Beware of the dragon bearing gifts – Chinese loans and investments in the Philippines

1 June 2017 by Randy David

CC - Flickr - Jon Bragg

Following President Duterte’s state visit to China in October 2016, 27 deals have been signed with Chinese state entities and business corporations covering around US$9 billion in loans and US$15 billion in investments. The President proudly touts these achievements as having been made possible by the reversal of the previous administration’s unfriendly attitude toward China.

These loans and investments are intended to jump-start the Duterte administration’s ambitious infrastructure program and to build production facilities aimed at promoting inclusive development. Apart from the large sums of money being committed by China, very little is known of their terms and conditions, and the local parties involved in these foreign-assisted projects and investments.

That much can be gleaned from a recent study done by Kenneth Cardenas, a former sociology instructor at the University of the Philippines and currently a PhD student at York University in Canada. [1]

The study raises issues and questions that are reminiscent of the debates about foreign aid in the 1970s and 1980s, when the chief villain was Western imperialism and its associated institutions — the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF) and the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

. The classic work in this field remains Teresa Hayter’s “Aid as Imperialism,” a slim volume that ironically bears much of the influence of Maoist thinking of that era.

There were also a number of well documented studies about Japanese economic aid during that period. Many of these were done by Japanese scholars who could not bear the thought of Japan ensuring its continued prosperity by exploiting the needs of poor countries in the guise of providing them aid. The conclusions they drew are instructive for our time: Japanese aid had been mostly in aid of Japanese business.

In study after study, it was shown that projects funded with outright grants or concessional loans were found to be greatly overpriced. They came with Japanese project consultants who were paid astronomical fees. The projects chosen matched not so much the priorities of the country being aided as the needs of Japanese companies to generate more business abroad. They tapped local partners or proxies that had the political clout to push projects through the corrupt-ridden labyrinths of Third World bureaucracies. Some projects were completed, many others were not. But it didn’t really matter so long as the recipient government assumed the obligation to pay.

Can Chinese aid be any different?

Deborah Brautigam, a scholar based at the American University in Washington D.C., has been a close observer of China’s aid activities in Africa. Her book, “The Dragon’s Gift” (Oxford University Press, 2011), is the most comprehensive account of the nature and consequences of Chinese aid. It would be well for our professional civil servants at the National Economic and Development Authority to glean some lessons from this book before they approve any of the deals with China, particularly those that ultimately have to be paid with our people’s money.

Brautigam’s book might shed some light on the incredible problems that the Philippines has found itself embroiled in with regard to China-funded projects like Northrail and the NBN-ZTE, both contracted during the China-friendly administration of President Gloria Macapagal Arroyo.

Both projects have been canceled — with no railway and broadband network in sight — but they have left a trail of huge debts that continue to bleed the nation’s coffers. We might remember the cases that were filed and the political scandals that attended both projects. But only a few may know how much money has been paid to the China National Machinery and Equipment Corporation Group, which was supposed to supply the railway system that would link Metro Manila to Central and Northern Luzon, and the China Eximbank that provided the bulk of the financing.

At the signing on Dec. 30, 2003, for Northrail’s Phase 1, the original contract price agreed was US$503 million. Of this amount, $400 million was to be borne by the Chinese company, and $21.5 million by the Philippine counterpart through a loan from the Development Bank of the Philippines. Six years later, the Chinese raised the project cost to $593.88 million, and the Philippine government did not object.

When the project was canceled in 2012, the Philippine government filed for arbitration. A Commission on Audit report released in 2013 showed that as of December 2011, we had paid the Chinese company a total of $210.48 million for work supposedly accomplished. The COA claims that based on actual work done, there was an overpayment of $129 million. We assume that the past administration refused to pay more until a ruling on this case is issued.

It appears, however, that the present administration may be taking a different route. Last May 7, at the sidelines of the Asian Development Bank meeting in Japan, Finance Secretary Carlos Dominguez was asked about Northrail and the case the Philippine government had submitted for arbitration. Business Mirror quotes him as saying that the arbitration was not just a “managerial headache” but also a “huge” financial burden.

“I signed this huge check for an idiot thing that never gets done. I tell you, my hands bleed when I do that. And there’s some more to pay so [lets end it]. What’s past is past, everybody made a mistake here, let’s move ahead. I think that’s the right way to go.”

The past is indeed past, but that doesn’t mean we can’t learn from it.

Source: ESSF
* Philippine Daily Inquirer / 12:10 AM May 14, 2017:


[1Published by the Philippine Center for Investigative Journalism, Cardenas’ study may be accessed at

Randy David

writes a column for the Philippine Daily Inquirer and hosts one of the longest-running public affairs talkshows on Philippine television, Public Forum (renamed Public Life). He is a full professor of sociology at the University of the Philippines in Diliman, where he has taught for over thirty years. He was founding director of the Third World Studies Center and former editor of its journal Kasarinlan. He trained in sociology at the UP and the University of Manchester in England. A former chair of the socialist organization BISIG, he serves on the board of various non-government organizations and is active in coalitions as Labang ng Masa.



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