Limits of Chinese Soft Power in the Philippines

UNCLAS SECTION 01 OF 04 MANILA 000998

SIPDIS

SIPDIS
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STATE FOR EAP/MTS, EAP/EP, EEB/IFD/OMA
STATE PASS EXIM, OPIC, AND USTR
STATE PASS USAID FOR AA/ANE, AA/EGAT, DAA/ANE
TREASURY FOR OASIA
USDOC FOR 4430/ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN
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E.O. 12958: N/A
TAGS: EFIN ECON PREL PGOV KINR KCOR RP CM
SUBJECT: Limits of Chinese Soft Power in the Philippines

Ref: A) 2007 Manila 2456, B) Manila 668

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1. (SBU) Summary: China's soft-power diplomacy has recently stumbled
in the Philippines under a months-long media barrage of corruption
allegations and scandal investigations. This has occurred against
the backdrop of a tenfold increase in bilateral trade since 2000,
increased security cooperation, and the signing of dozens of
bilateral agreements in recent years. In spite of the influence
wielded by Filipinos of Chinese ancestry, recent scandals have
reawakened long-held views among Filipinos that link ethnic Chinese
to corrupt practices. Strengthened Philippine-PRC ties do not imply
a weakening of our strong bonds with the Philippines. Polls show a
majority of Filipinos view the U.S. as the Philippines' most trusted
ally, both now and 10 years hence. The Mission continues to stress
that we do not view increased Chinese trade, investment, and
development assistance as detrimental, while noting the need to use
aid to strengthen transparency and good governance. End summary.

Background of Chinese-Philippine Relations
--------------


2. (U) Mainland Asia's relations with the Philippines long predate
the arrival of Iberian influence in the 16th century. Trade with
Mainland Asia, including China, was flourishing by the 10th Century,
and by the time of the Ming Dynasty (1368-1644),many Chinese
traders had settled in Manila and other trading centers throughout
the Philippines and elsewhere in Southeast Asia. Chinese merchants
later forged mutually beneficial alliances with the Hispanic elite
who dominated political and religious life in the Philippines for
over three centuries. Under the Spanish 'comprador system,' ethnic
Chinese were allowed a monopoly on trade between the Philippines and
China, a key leg in the fabulously lucrative 'galleon trade' between
Manila and Europe via Acapulco, and allowed to dominate Philippine
domestic businesses. However, the Hispanic elite also sought to
keep the power of the Chinese in check through discriminatory laws
and periodic bloody pogroms.


3. (SBU) Ethnic Chinese still enjoy disproportionate economic and
political power in the Philippines; by one estimate, they comprise
only two percent of the nation's population, but control 50 percent
of listed equities. Filipino-Chinese have made great strides in
recent decades in overcoming the long-standing racial prejudices;
nonetheless, there is still a latent sense among many Filipinos that
the Chinese are amoral profiteers. The increasing economic and
political influence of China in regional affairs has reawakened this
broadly held stereotype and fed a suspicion that both Chinese
development assistance and business practices are rife with
corruption and intended to further Chinese -- not Filipino -- ends.

Growing Philippine-PRC Relations
--------------


4. (SBU) Since reciprocal state visits by Philippine President
Gloria Macapagal-Arroyo and PRC President Hu Jintao in late 2004 and
early 2005, the Philippines has signed dozens of agreements with
China on a wide range of economic, political, cultural, and military
issues. In January 2008, the PRC Embassy in the Philippines
announced that the trade volume between the Philippines and the
Chinese mainland had surged to a record high of $30.62 billion, an
almost 10-fold increase from the $3.14 billion in 2000. (We have
questioned these figures in ref B. By comparison, trade between the
U.S. and the Philippines was $17.1 billion in 2007.)


5. (U) Defense cooperation between China and the Philippines
expanded significantly during President Arroyo's state visit to
China, as she and Premier Wen Jiabao identified key areas of
cooperation, such as sea rescue, disaster mitigation, and training
exchanges. Setting aside their competing territorial claims to the
Spratlys, the two countries espoused the joint development of the
disputed area. In November 2004, the Philippine Defense Secretary
and his PRC counterpart signed a memorandum of understanding on
defense cooperation in Beijing.


6. (U) In May 2007, high-ranking People's Liberation Army (PLA) and
Philippine defense department officials held their third bilateral

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defense and security dialogue in Manila, during which they discussed
counter-terrorism, the situation in Northeast Asia, and mutual
concerns and interests related to maritime security, national
defense, and military construction. At the end of the dialogue, the
PRC delegation promised more security assistance to intensify
defense relations between the PLA and the Armed Forces of the
Philippines. On the Philippine side, defense officials reaffirmed
Manila's adherence to the one-China policy and acknowledged China's
important contribution to international and regional peace.


7. (U) Though China has also invested heavily in the Philippine
agricultural and mining sectors, its most prominent economic
activities in the Philippines are in infrastructure development.
Beijing has poured $450 million into the rehabilitation of the North
Luzon Railway system, linking metropolitan Manila with Angeles City
in central Luzon. The provision of a $450 million soft loan for the
rehabilitation project, in addition to US$500 million in other soft
loans (for the construction of a dam, an elevated highway, and a
provincial airport),makes Beijing one of the biggest providers of
concessionary loans to the Philippines. In 2007, Beijing indicated
an interest in upgrading the Southern Luzon rail system as well.

Big Brother
--------------


8. (SBU) In her opening statement at the 10th ASEAN-China Summit in
January 2007 President Arroyo likened China to a "big brother" and
called on Southeast Asian leaders to continue strengthening ties
with the regional giant, saying Beijing has an important and
strategic role in the economic development and security of the
Asia-Pacific region. Philippine Trade Secretary Peter Favila and
Finance Secretary Margarito Teves have both described the
Philippines' growing trade with China as cushioning the impact of a
U.S. economic slowdown.

Allegations of Corruption and Improper Influence
-------------- ---


9. (SBU) More recently, however, PRC-Philippine relations have hit a
rough patch. As reported reftel, a $329 million contract for a
national broadband network signed by a Philippine Cabinet Secretary
and China's state-owned ZTE Corporation in April 2007 unleashed
allegations of corruption that received extensive media coverage in
the Philippines. The number of senior officials tainted by this
scandal continues to grow as lengthy Senate hearings implicated
President Arroyo's husband Jose Miguel "Mike" Arroyo, various
cabinet members, and prominent business people. While there is
little hard evidence to support the allegations, politicians and
media used a broad brush to tar all associated with the project.

Bungled Chinese Response
--------------


10. (SBU) The ZTE case is typical of the deals that China reportedly
uses worldwide to make friends and buy influence. Unlike the World
Bank, the IMF, and many bilateral providers of assistance here,
China does not link its aid to issues such as good governance, rule
of law, or respect for human rights. Public skepticism and scrutiny
have underlined shortcomings in China's soft power efforts. For
months after the ZTE scandal surfaced, the PRC Embassy would only
comment that scandal allegations were "purely domestic" or an
"internal Philippine affair." In October 2007, Emboffs met with PRC
Embassy officials who seemed to hint at questionable tactics, saying
the PRC government believed "in following local laws, but also in
following local traditions." However, non-Chinese contacts reported
to us that the publicity given the ZTE scandal violated the Chinese
diplomatic injunction to maintain a low profile. The resulting
damage to China's image reportedly hastened the replacement of
China's ambassador to the Philippines in September 2007.

Emotional Outburst Directed at Chinese
--------------


11. (SBU) The ZTE scandal hearings before the Philippine Senate
featured Senate Foreign Relations Committee Chair Miriam Santiago's

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emotional outburst that "the Chinese invented corruption for all
human civilization." Although the PRC Embassy afterwards demanded
and received an apology, Senator Santiago's statement reflected the
widely held Filipino view that the Chinese frequently use unethical
business practices. Interestingly, newspaper editorials have
contrasted this perception of unethical Chinese with the Filipino
perception of honest Americans, and have specifically praised the
U.S. Foreign Corrupt Practices Act.

Ineffective Damage Control
--------------


12. (SBU) The Arroyo administration formed a panel to review all
Chinese government-funded projects in the Philippines, and put on
hold the broadband project, a cyber education project, and two large
agricultural projects. When Arroyo met Chinese President Hu Jintao
in Shanghai October 2, 2007, she reportedly spent much of the
meeting explaining her decision to cancel the ZTE contract and
suspend other projects funded by China. Afterwards, President
Arroyo urged China to increase its investments in the Philippine
agriculture, fisheries, and infrastructure sectors, thanked it for
providing loans for the North Luzon Railway project, and asked the
PRC to conduct more joint exploration activities in the South China
Sea to strengthen its partnership with ASEAN member states.
However, despite the Arroyo administration's efforts to contain the
damage, the spoken and whispered allegations of Chinese corruption
expanded to cover virtually all major PRC-funded projects in the
Philippines.

More Scandals
--------------


13. (SBU) In mid-2007, it looked as though China had the inside
track on winning the contract for the expansion of the airport at
the former Clark airbase. However, allegations of overpricing and
kickbacks in China-financed and -built infrastructure projects
arguably led China to withdraw its offer of concessionary financing
for the project in order to avoid the controversy that might follow
the contract. The scrutiny of Chinese-funded projects has
intensified and expanded to cover the Bauang pump irrigation
project, the General Santos Fish Port Complex, the Northrail
Project, and others. Senate investigators have recently summoned
Chinese ZTE executives for questioning.

And Then There's the Spratlys...
--------------


14. (SBU) Controversy over the failed ZTE broadband deal even
spilled over to affect the delicate status quo in the disputed
Spratly Islands, where tensions over competing territorial claims
were lowered by a 2005 trilateral agreement among the Philippines,
China, and Vietnam that facilitated peaceful joint exploration of
the islands' anticipated mineral resources. In the wake of the ZTE
scandal, allegations emerged that the Arroyo administration allowed
the seismic exploration deal in exchange for bribe-tainted loans.
Legislative and media critics of Arroyo have suggested that the
administration is dragging its feet in meeting a 2009 UN Convention
on the Law of the Sea deadline for defining the Philippine
archipelago's baselines.

Comment
--------------


15. (SBU) China's use of soft power in the Philippines has given it
another bruising lesson in the role of a free press and political
opposition in a democracy. The current problems are likely a
temporary setback for China and the Philippines, as bilateral trade
and policy ties continue to rise in concert with the growth in
China's economy and influence. Still, strengthened Philippine-PRC
ties do not imply a weakening of traditionally strong Philippine
bonds with the U.S. Public opinion polls consistently show that a
majority of Filipinos sees the U.S. as the Philippines' most trusted
ally and, when asked which country they see being most important to
the Philippines in 10 years, a similar majority respond that it will
be the United States. At the same time, we have made clear in both

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public and private comments we do not view increased Chinese trade,
investment, and development assistance as detrimental, even while
stressing the need to use aid to strengthen transparency and good
governance.

Kenney