DEVELOPMENT LOANS, DIRT CHEAP
The Philippines gets more loans from China.
By Courtney Siu

China’s loans to African nations, most controversially in war-ravaged Sudan, have challenged the World Bank’s approach to lending to poverty-struck nations. But China has been active closer to home, too, with intensified development lending to the Philippines.

China is the Philippines’ second-largest bilateral lender, having committed up to US$2 bn a year in loans for each of the next three years. (Japan, which pledges up to US$6 bn to the Philippines per year, is currently the largest.) The loans, at concessionary rates, are slated for much-needed infrastructure development. Among those approved to date: US$70m to Manila’s Metropolitan Waterworks for improvement to its long-term water supply (China is targeting a total of US$1.37 bn in loans for water projects), US$500m for phase one of the North Railway project, and US$100m for a container inspection system for the Bureau of Customs.

Direct investment by Chinese companies has become an important source of capital for the Philippines’ mining sector, opened to foreign investment only in 2004, mostly in nickel used for steelmaking. Investors to date include Tianjin-based Rockcheck Steel, which will put US$200m into developing a new ferro-nickel plant; Jinchuan has an agreement to explore MacroAsia’s Palawan site (on hold because MacroAsia’s rights to the site are currently under dispute); and separately, Jinchuan plans to tap the Nonoc nickel mine. In 2006, the Philippines supplied 88.5% of China’s total nickel imports, taking over from Australia’s mines in 2005.

This infusion of capital from its powerful neighbor comes at a good time for the Philippines, where GDP is expected to grow 5.5% this year and the peso is at a six-year high. The strength of the currency has contained inflation and helped the Philippines pay off its debts to the IMF. By lending to the Philippines, China is helping the country diversify credit risk away from the multilaterals, such as the World Bank and the Asian Development Bank (ADB), which have traditionally lent with more stringent requirements. Philippine officials say Chinese loans are cheaper and meet faster approval than those extended by the ADB.

The Arroyo government is amid a massive effort to revise the economic provisions of the nation’s constitution. This includes measures to liberalize land ownership and allow investors to own 100% of public utilities. The success of these measures is in doubt, given the likely outcome of the Philippines’ mid-term election, which looks set to hand the opposition a majority in the Senate. “We are hoping that the Senate will see the merits of our economic proposals,” says Gary Teves, the Philippines’ finance secretary. But convincing the populist opposition legislators won’t be easy.

The outcome of the polls will also have bearing on whether the government will open the sale of state-owned mines to foreign investors. If that happens, Chinese companies are certain to provide a fresh presence among the usual suspects from the US, Australia, and Europe in an aggressive bidding contest.