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Chinese Subic Takeover Plans Provoke Backlash in the Philippines

Feb 26 , 2019

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The prospect of a Chinese takeover of a major shipyard in Subic, the former site of America’s biggest overseas naval base, has provoked backlash among the Philippine defense establishment and broader society.

Unable to service $1.3 billion in debt, the Philippine subsidiary of the South Korean shipbuilding giant Hanjin Heavy Industries and Construction recently declared bankruptcy. It subsequently sought the assistance of the Philippine government to find new investors and save 3,000 jobs in the world’s fifth largest shipbuilding yard, spanning over a 300-hectares.

Last month, Ceferino Rodolfo, managing head of the Philippines’ Board of Investments (BOI), announced that two Chinese companies have expressed interest in taking over the operation of the former Hanjin facility. Authorities refused to reveal the identities of the Chinese companies, but the news immediately invited a chorus of criticism across the Philippines.

The Philippine Defense Secretary Delfin Lorenzana made it clear that a local firm, rather than Chinese companies, should take over operating the facility for national security considerations. Philippine strategists fear a possible Beijing ‘economic cabbage strategy,’ whereby Chinese companies systematically surround and infiltrate strategic sectors and locations in the country.

Paradoxically, the rapid improvement in Philippine-China diplomatic relations under President Rodrigo Duterte has only exposed long-simmering anxieties over growing Chinese influence in the country. The broadly negative response to big-ticket Chinese investments only underscores how deeply ingrained Sinophobia is among the Filipino elite and broader public. 

The Maritime Silk Road

During his November visit to the Philippines, Chinese President Xi Jinping signed a number of key agreements with his Filipino counterpart in order to deepen their budding strategic partnership.

One of those agreements pertained to the Philippines’ formal accession to the China’s Maritime Silk Road Initiative (MSRI), the ‘road’ aspect of the grand Belt and Road Initiative (BRI), which aims to recreate the Silk Road in China’s image.

The two countries have expressed “their common aspiration to cooperate on the Belt and Road Initiative for their mutual benefit.” Thus, China’s prospective entry into strategic sectors and locations in the Philippines should be seen within the context of deepening BRI-oriented cooperation.

Perched only 50 miles northwest of Manila and the Philippines’ industrial heartland, the Subic Bay Freeport Zone hosts state-of-the-art deep water port facilities and, more importantly, cradles the highly strategic South China Sea.

Acquisition of a major shipyard in the area plays directly into Chinese companies ‘going global’ strategy in recent years. Since the BRI’s official launch in 2013, Chinese companies have been on the aggressive campaign of expanding their footprint in the global maritime commerce landscape, so far overseeing the construction and operation of 42 ports across 34 countries. From Darwin, Australia to Piraeus in Greece and the Gwadar Port in Pakistan, Chinese companies have become world-class port operators with unprecedented reach.

Two Chinese companies in particular, namely China Ocean Shipping Company (COSCO) and China Merchants Group, have been at the center of this unfolding drama. There are speculations that at least one of the companies may be a bidder for the giant Hanjin facility in Subic.

Ostensibly, the takeover is for purely commercial purposes. The Chinese companies are able to aid host nations with their expertise in cutting-edge logistics and large capital. Local officials and the Subic Bay Metropolitan Authority, the agency in charge of promoting investments in the Subic Bay Freeport Zone, have pressed the Philippine government to find potential investors to save thousands of imperiled jobs at the Hanijn facility.

Economic Cabbage Strategy

But there are also growing suspicions over the non-commercial aspect of Chinese investments in critical infrastructure.

Filipino strategists often cite Sri Lanka’s case, where a Chinese company won a 99-year-lease over the prized Hambantota port under a controversial debt-for-equity arrangement. For the Filipino strategists, Subic is just too important to hand over to any Chinese company.

Under the Enhanced Defense Cooperation Agreement (EDCA), Manila and Washington initially considered establishing semi-permanent American bases in Subic, American forces would be able to enjoy permanent “rotational access,” store disaster relief supplies, and place surveillance and security infrastructure in designated areas. But Duterte scraped the plan amid his diplomatic spats with Washington.

Though Subic no longer hosts American naval bases, the U.S. Navy warships still regularly visit the area for military exercises, goodwill port calls, and repair and refuel operations. In recent years, the Philippines and the U.S. have conducted major joint military drills and war-games in the area under the annual Balikatan exercises.

Warships from other traditional partners such as Japan and Australia, which often participate as observers during the Balikatan exercises, have also made regular visits to the Subic facility in recent years. Crucially, Subic lies only 100 nautical away from the heavily contested Scarborough Shoal, which is currently under China’s de facto jurisdiction.

Some Filipino strategists fear that China’s purchase of this major shipyard could serve as a Trojan horse for monitoring and, eventually undermining international access to the highly strategic port.

Chinese companies have reportedly been purchasing commercial facilities close to other important bases, including the Bautista Airbase in Palawan which faces the Spratly chain of islands in the South China Sea.

Prominent legislators such as Senator Grace Poe have openly opposed any Chinese takeover of any “critical and strategic national asset.” In the senator’s resolution last month, she said that “There is a need to determine the adequacy of statutory, regulatory and other legal frameworks for the ownership, control and management by foreign corporations and entities of strategic industries that are vital for national security, development, and economy such as shipyard facilities,” the senator added in her senate resolution last month.

She made it clear that the “security and control over Subic Bay are paramount to the security of the [South China Sea]” and the Philippines’ “sovereign rights and jurisdiction” in the contested area.

In recent months, the Philippine senate has also launched inequities into Chinese investments in the Philippines’ telecommunications sector, while blocking a $400 million deal between Philippine security agencies and a Chinese surveillance company on national security grounds.

Defense chief Lorenzana, in turn, has suggested for the Philippine Navy, in tandem with a consortium of (non-Chinese) private investors, to take over the Hanjin facility, for enhancement of indigenous shipbuilding capacity. “[It] would be good if a local company would acquire and operate it to support our Navy modernization… It [is] up to [our economic minsters] to decide but that is the ideal set up [for the military].”

Ahead of midterm elections, which are serving as a referendum on Duterte’s controversial presidency, there is an earnest pushback against growing Chinese strategic footprint in the Philippines. And it only shows the fragility and reversibility of the ongoing rapprochement.

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