No freebies in China deals

Like all state visits in the past, President Duterte’s trip to China was described by his spokespersons as a success.

They touted the $24-billion investment and credit line agreements that were signed by Philippine government officials and private business executives with their Chinese counterpart.

Since these contracts are primarily expressions of interest to invest or engage in joint venture activities, their terms and conditions have to be spelled out or negotiated by the parties at a later date.

Judging from similar arrangements it entered into with our Asean neighbors, China is expected to offer long-term concessional loans or investments to the Philippine government or private Filipino companies to finance the costs of the projects subject of the agreements.

No doubt, China will demand that these financial arrangements be denominated in renminbi, its official currency, which was recently included by the International Monetary Fund in its basket of reserve currencies along with the US dollar, euro, British pound sterling and Japanese yen.

The loans’ interest rates and repayment terms will likely be 3 or 4 percent lower, or more liberal, than those offered by multilateral lending institutions for projects of the same nature.

The term of the loans may range from 20 to 25 years with a grace period (meaning, no payments will be made until after the lapse of a certain number of years from the date of the signing of the loan or completion of the project) tacked on as sweetener.

At first blush, the impression is created that by agreeing to these deals, the Chinese government is doing the Philippines a favor from the goodness of its heart, or in consideration of historic bilateral relations. But no, the loans or investments are not grants or cash donations. They will be paid back through yearly amortization or dividend payments sometime in the future.

It is not a one-way traffic in the Philippines’ favor. Aside from getting a bigger foothold in the Philippine economy, China will benefit from the investments or loans, like any other lucrative financial transaction.

The projects that China has promised to invest in or finance may be supply-and-build projects or supplier’s credit—i.e., materials are delivered and the government or private counterpart will handle their installation.

Unless China agrees that the materials can be purchased from elsewhere (which is most unlikely), they will be made in China and the services needed to install and make them operational will be provided by Chinese technical staff.

The cost of the components of the project, including the salaries of the Chinese workers, will be defrayed from the investment made or loan extended for the project.

At best, the benefits that Philippine-based businesses will reap from the projects during their construction will be by way of supply of gravel and sand, food, transportation, housing and unskilled labor.

On the other hand, the manufacture of the components of the project in China will further stimulate its economy and create additional jobs.

The contribution to the Chinese economy will be further enhanced when the obligation to pay the principal and interest of the loans, or pay dividends for the investments, kicks in. Although the repayment rates may be low, it’s still money going to China’s coffers.

To be fair, the same scenario applies to all countries that engage in similar investment or lending schemes. If any goodwill is created in the process, it’s merely secondary.

While we should be thankful for the agreements entered into with China (assuming they all push through), they are not purely philanthropic. They were made in the regular course of business.

Raul J. Palabrica ([email protected]) writes a weekly column in the Business section of the Inquirer.