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Executive Summary

In this report, we assess the money, relationships, and outcomes of two decades of Beijing’s financing for development in the Philippines. We aim to answer three critical questions.

Following the Money

Beijing has channeled a formidable US$9.1 billion in state-directed development finance to the Philippines over two decades (2000-2022) for more than 200 projects. However, the PRC’s appetite to finance Philippine development is erratic and influenced by its relations with Manila. Beijing bankrolled the Arroyo and Duterte administrations’ priorities with gusto, while frosty relations with Aquino dampened collaboration. As the Marcos Jr administration diversifies its relationships and distances itself from Beijing, future PRC investments will likely mirror dynamics observed previously under Aquino.

The PRC’s support was often smaller (until 2016) and less generous compared with other donors. Moreover, its financing came at a higher cost: only 6 percent was issued as aid (i.e., grants or no- or low-interest loans), and the rest was high-interest debt. Even at the apex of diplomatic relations between the two countries, for every US$1 of aid Beijing gave to the Philippines in 2016, it issued US$167 in debt. By 2019, the terms were worse: US$1 of aid for every US$211 of debt.

Notably, Beijing employs a two-track model in the Philippines. It counts on infrequent big-ticket infrastructure projects, financed with debt on less concessional terms, to generate economic returns. The PRC also subsidizes many inexpensive social projects more frequently to cultivate goodwill.

Beijing uses its development finance to crowd in market opportunities for Chinese firms and bankroll activities in politically important regions. Between 2010 and 2023, new commitments of inbound Chinese FDI to the Philippines (worth US$21.9 billion) skyrocketed by 514 percent, driven by outsized investments in 2012 and 2018. The timing, sector, and geographic focus of these FDI flows reflect the importance of three strategic factors: proximity to PRC development finance projects, the presence of attractive local tax incentives, and Beijing’s desire to position itself as a supplier of value-added products over raw material commodities.

Understanding the Relationships

It is tempting to assume that the PRC operates as a unitary actor with tightly controlled operations among a few players. In fact, our analysis shows the opposite. Fifty-two Chinese financiers, often state-owned policy or commercial banks, were primarily responsible for mobilizing money. However, Beijing relies on an extensive network of 101 banks from across Europe, North America, and Asia as co-financiers to pool risk, vet borrowers, assess project viability, and contribute capital for big-ticket infrastructure projects.

Beijing has an overreliance on 37 Chinese state-owned enterprises (SOEs) as its go-to implementers. Opaque assistance terms, limited competitive procurement, and weak reporting requirements create perverse incentives for these implementers to cut corners or collude with local counterparts. Notably, 43 percent of Chinese SOE implementers in the Philippines have been directly sanctioned by international finance institutions like the World Bank or Asian Development Bank for questionable financial practices or indirectly associated with such practices through a parent-subsidiary relationship.

On the demand side, local governments in economically dynamic and politically connected areas and national-level agencies were frequent recipients of PRC-financed projects. State-owned and private sector firms in the energy, utilities, and extractives sectors attracted sizable dollars. Beijing is favorably disposed to work with recipients that have strong ties to mainland China (promoting Chinese language and culture) or linkages via Filipino-Chinese diaspora families or groups.

Unpacking the Outcomes

Although Beijing delivers on projects more quickly in the Philippines—just under one year on average from committing financing to completing a project—some regions and sectors have longer wait times than others. Big-ticket infrastructure projects are more risky and complex to execute. For example, the worst delays were in the agriculture, forestry, and fishing sectors where projects took more than four years to deliver, reflecting logistical hurdles, environmental challenges, or social unrest from displacement.

Although the particulars of the six suspended or canceled PRC projects varied, common themes emerged: weak management and oversight systems in the Northrail and National Broadband Network projects; local opposition to project goals and financing in the Agus 3 Hydropower and Cyber Education projects; external shocks such as COVID-19 prompting China to exit from the Panay-Guimaras-Negros Island Bridges project; and geopolitical sensitivities stoking calls to cancel contracts with the PRC over maritime disputes.

Taking a portfolio-level view, Beijing’s development finance faces heightened exposure to risk from its trusted cadre of Chinese state-owned and private sector implementers. Over half of the PRC’s development finance dollars (US$4.5 billion) relied on Chinese implementers with tarnished performance. Six of the highest-risk firms, involved in US$870 million worth of PRC-financed development projects, were associated with both questionable financial practices and higher ESG risk exposure.

What are the outcomes of Beijing’s infrastructure bonanza in the Philippines? Chinese financing (both development finance and FDI) may positively contribute to economic gains, at least in aggregate terms. However, these benefits do not yet appear to trickle down in a visible way to Filipinos. As PRC financing increased, Filipinos surveyed were more likely to say they struggled to afford food and shelter, an important indicator of financial health.

Just under 40 percent of Beijing’s development finance portfolio in the Philippines is associated with at least one type of environmental (E), social (S), or governance (G) risk. However, there is less clarity on whether and how these risks translate into measurable harm. PRC development finance and FDI were associated with favorable outcomes in the social sector (i.e., youth development and civic engagement). Results were polarized when it came to governance and environmental outcomes.