How The Philippines Is Missing China’s Soft Rebound – Analysis
During the six-year Duterte era, the Philippine ties with China were recalibrated from friction to cooperation. In the past year, that period faded away. The costs are evident, huge and rising.
One of the key assumptions of those policymakers who regard the plunge of the bilateral ties as a positive phenomenon is that China’s economy is “in a freefall.” Why build on bilateral ties with a dying dinosaur is their theme.
The problem is that the assumption is flawed. Worse, the costs of the plunging bilateral ties, which these policymakers describe as minimal to manageable are high – as evidenced by bilateral trade, investment and tourism.
China’s brighter macroeconomic outlook
When Chinese Premier Li Qiang took the podium at the World Economic Forum in Davos, he said that in the 4th quarter of 2023, GDP growth amounted to 5.2%. That’s slightly better than the official target of around 5%. Chinese economy is heading toward a soft rebound.
Retail sales grew by 7.4% in December from a year ago. Chinese consumers are gradually returning to the marketplace, but they remain cost-conscious. The impending China’s New Year is likely to generate “9 billion passenger trips,” which will accelerate growth in retail, tourism and transportation.
There is significant pent-up demand in China, as evidenced by the above-trend deposits. The trick is to unleash that consumption power, and the first condition is a promising job market outlook. According to China’s National Bureau of Statistics, the unemployment rate in cities in December was 5.1%. Last summer, the unemployment rate for young people aged 16 to 24 soared to record 21.3%. Now, it is at 14.9% – back where it was in January 2022.
Furthermore, industrial activities are picking up, with industrial production rising by 6.8% in December from a year earlier, thus beating forecasts. And the same goes for fixed asset investment, which increased by 3% in 2023, slightly above the predicted increase.
There is also broad expectation for targeted fiscal support. And in light of the elevated real interest rates, space remains for rate cuts. As the Fed is likely to enter the rate cut cycle later in 2024, China’s cuts will ensue.
And the long-term? As premier Li noted in Davos, China has some 400 million people in the middle-income group, and that number is expected to double to 800 million in the next decade. In the next decade, urbanization in China will create huge demand in sectors such as housing, education, medical and elderly care, especially as there are still nearly 300 million rural Chinese who will eventually migrate to cities – and a substantial opportunity to domestic and international actors.
However, as I warned almost a year ago (see my column of TMT, March 27, 2023), the Philippines is missing out.
Double-digit falls in exports
What are the implications of China’s soft rebound from the Philippine perspective? Why should these matter from the standpoint of the policymakers in Manila? Let’s start with trade.
In the pre-pandemic Duterte era, Philippine exports to China were booming and future seemed even better. Had the status quo prevailed, exports to China would be increasing with its soft rebound. But those days have faded. Worse, the fall is across-the-board, as evidenced by recent year-on-year data.
Exports from the Philippines dropped 14% year-on-year to $6.1 billion in November 2023, cooling from a six-month low of 18% decline in October. Sales were in double-digit fall for electronic products (-25%), especially office equipment (-35%), automotive electronics (-28%), and telecoms (-26%).
Shipments decreased for top trading partners, including Hong Kong (-38%), Taiwan (-16%), and China (-6%). In January to November, exports were 8.4% lower than the same period last year. Similarly, imports stalled from a year earlier to $10.8 billion in November 2023, following a 2.4% fall in October and a nine-month sequence of decline.
Fast entry into the Regional Comprehensive Economic Partnership (RCEP) might have alleviated the situation. Ex-President Duterte initiated the RCEP deal in September 2021, but the Senate ratified it only a year ago (TMT, Feb. 27, 2023). Without a timely ratification, Philippines lost billions of dollars.
And the timing doesn’t help. Since last fall, infrastructure and other state investments have recorded solid growth in China. Beijing has also approved $137 billion in sovereign bond issuance. Infrastructure investments support imports like iron ore, crude oil, and copper, which bodes well for commodity exporters to China – from countries that prioritize cooperation over conflict.
Double-digit falls in foreign investment
Last week, Speaker Ferdinand Martin G. Romualdez told foreign investors in Davos that “now is the most opportune time to invest in the Philippines.”
Have investors listened?
Net foreign direct investment (FDI) in the Philippines shrank 30% year-on-year to $0.66 billion in October 2023. All major FDI components posted a decrease in net inflows during the month. From January to October, FDI net inflows were 17.5% lower compared to the corresponding period last year
Thanks to the offshoring of services in information and communication technology, many local observers believe the Philippines is well-positioned for the future. But Romualdez should have seen the writing on the wall in Davos, where the International Monetary Fund warned that a whopping 40% of jobs across the globe could be affected by the rise of artificial intelligence (AI). IMF chief Kristalina Georgieva urged policymakers to tackle this “troubling trend” and “to prevent the technology from further stoking social tensions.”
One of the prime areas to take a hit could be ICT offshoring.
Then there is the debacle with China’s huge Belt and Road Initiative (BRI), which has facilitated Southeast Asia’s economic recovery. China’s trade with ASEAN member states has been growing 2-3 times faster relative to the EU and the US, respectively. Yet, last November, the Philippines dropped out of the projects under China’s global infrastructure scheme, saying it would seek other sources; that is, the West whose inflation has been lingering in the Philippines as well.
As many concerned observers have noted, the risk is that Manila is sleepwalking into military and nuclear minefields, while fragmenting the ASEAN unity (TMT, Feb. 20, 2023).
Militarization will limit opportunities to bring jobs and capital into the Philippines. Not just because of Manila’s friction with Beijing, but due to the perception that the associated uncertainty may endanger long-term investment horizons. Would you invest heavily in a country proposing to serve as a logistics platform in a potential Taiwan conflict?
That leaves tourism.
Chinese visitors’ 86% fall
As I argued nearly a year ago, the anticipated inflows of Chinese mass tourism will not materialize (TMT, Mar. 20, 2023). In 2019, there were more than 1.7 million arrivals from China, making up 22.2% of total arrivals to the Philippines. This translated to about 2.3 PHP billion in tourism receipts. The expectation was that these numbers could double to Thai levels this year.
Only a year ago, the Department of Tourism (DOT) aimed to have 2 million Chinese visit the Philippines in 2023. Yet, Bob Zozobrado, chief of The Tourism Congress of the Philippines (TCP), warned that the hurdle to getting more Chinese back was the visa quota implemented by the Department of Foreign Affairs (DFA). What DOT giveth, the DFA taketh.
A year has passed. So, how is Chinese tourism in the Philippines? The official story is: It couldn’t be better! According to DOT chief Christina Frasco, Philippines surpasses year-end target with 5.45 million international visitor arrivals in 2023.
Of the total visitors, 92% were foreigners. South Korea retained its top spot as the country’s main source of international visitors, with 26.4% of the total. It was followed by the United States (16.6%), Japan (5.6%); Australia (4.9%); and China (4.8%).
Instead of the DOT’s original goal of more than 2 million Chinese visitors, the real figure turned out to be less than 265,000 – that is, a whopping plunge of 86% from the goal.
Missed opportunities
All these adverse trends were discernible already in spring 2023 (TMT April 24, 2023). For almost a year, they have escalated.
The question is, will this prove to be a temporary setback or a new norm. Will patient foreign investment be replaced by speculative hot money flows? Will trade horizons continue to be constrained by rising opportunity costs? And will tourism suffer from the same syndrome?
The early signs do not bode well for the future.
The original version was published by The Manila Times on Jan. 22, 2023