China debt trap fears shake the Philippines


China and the Philippines have drawn closer together under Philippine President Rodrigo Duterte. Image: Facebook

Exposed terms of a Chinese infrastructure loan to Manila controversially allow for the confiscation of national assets in case of default

Enter the Philippines on the growing global list of countries where Chinese loans and investments are being castigated by critics as potential sovereignty-eroding “debt traps.”

In a widely publicized presentation this week, Supreme Court Senior Associate Justice Antonio Carpio warned of potential Chinese confiscation of Philippine territory and resources under the proposed Chico River Pump Irrigation project.

The court justice claimed that the deal is expected to serve as a “template” for China’s multi-billion dollar investment plans in the Philippines, including for big ticket infrastructure schemes under Beijing’s US$1 trillion Belt and Road Initiative (BRI).

China has offered as much as US$26 billion in aid, loans and investments to fuel President Rodrigo Duterte’s “build, build, build” infrastructure building spree. Those big ticket promises were reiterated during Chinese President Xi Jinping’s visit to Manila last November.

Among 10 proposed big-ticket Chinese infrastructure projects, only one so far has cleared the preliminary stages of implementation.

Yet critics believe China’s promised investment bonanza has come in quiet exchange for Duterte’s strategic acquiescence in the South China Sea, where the two countries’ have competing claims and China is militarizing its controlled features.

Carpio’s warnings were thus immediately echoed via apoplectic headlines by mainstream Philippine media, which has taken a broadly critical view of Duterte’s widely perceived as overly cozy relations with Beijing.

The Philippine government has sought to downplay concerns raised by the magistrate as “pure hypothetical” paranoia.

Government officials assert that the revealed contract agreement was a “standard” practice and that the country is more than capable of servicing its debts to China and others.

China is expected to fund up to 85% of the $80 million (4.37 billion peso) project, one of the 10 big-ticket infrastructure projects proposed by Beijing.

The loan agreement comes with a relatively low interest rate of 2%, currently below commercial rates of between 3-5%, a “commitment fee” worth 0.3% per annum and a $186,260 “management fee.”

The Philippines has 20 years, inclusive of a seven-year grace period, to pay back the loan. Should it default, however, China could take over national assets as collateral, according to the loan agreement.

“In case of default by the Philippines in repayment of the loan, China can seize, to satisfy any arbitral award in favor of China, ‘patrimonial assets and assets dedicated to commercial use’ of the Philippine government,” the Filipino magistrate said, citing the loan agreement’s language.

The agreement also requires the Philippines to waive “any immunity” on sovereign or other grounds regarding national property put up as collateral should a repayment dispute emerge over the irrigation project.

Carpio warned that any debt settlement dispute would automatically favor China because the Beijing-based China International Economic and Trade Arbitration Commission will adjudicate any such cases.

He also highlighted the controversial confidentiality clause of the loan agreement, which apparently violates the Philippine 1987 Constitution’s provisions on the need for consultation with other branches of the state and key stakeholders in such matters.

The ultimate threat, Carpio said, was the possibility that China will ask for control of the disputed Reed Bank, an energy-rich area in the South China Sea, as part of any future Beijing-imposed debt settlement arrangement.

Last month, veteran lawmaker and senatorial candidate Neri Colmenares, a prominent public interest lawyer, also lashed out at the loan agreement as lopsided and “onerous.”

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