Analysis: China’s influence on Philippine economy is limited

MANILA, Philippines – China’s influence on the Philippine economy is limited enough for the Southeast Asian nation to have the guts to challenge it politically in a territorial spat most of its neighbors are not strong enough to stand for.

Analysts and observers, however, acknowledged there is a need to consider Sino-Philippine relations as a multi-faceted matter that transcends the South China Sea dispute, which has so far resulted in an arbitration case before a United Nations tribunal.

“In a sense, yes, there is a connection (between economics and politics). But what is important is that we do not let one thing define our relationship with China,” said Ramon Casiple, executive director of the Institute for Political and Electoral Reform.

The economics

Studies by the Office of the Chief Economist of the Department of Finance showed the Philippines is behind other major Asian countries affected by developments in China. For instance, when the yuan was depreciated versus the dollar last Aug. 11, the peso weakened against the greenback the least.

According to figures provided by the office, the peso weakened 0.5 percent against the dollar during that day, lower than the drop in value of the Korean won (1.8 percent), Singapore dollar (1.4 percent), Indonesian rupiah (1.7 percent), Malaysian ringgit (1.4 percent) and Taiwan dollar (1.4 percent).

Over-all, the correlation between the movement of peso-dollar and yuan-dollar is at 0.496, suggesting that for each one-percent drop of the Chinese currency to the greenback, only half of that is reflected in the peso-dollar exchange rate.

While this is quite high in economic standard, chief economist Gil Beltran said “the peso’s movement will be more gradual” than the renminbi – another name for the Chinese currency – because the latter is still tightly controlled.

“The Philippine peso follows a cleaner float than China’s managed floating system,” and thus any changes to the latter will tend to be more severe, Beltran explained in an economic bulletin.

The move by the Chinese authorities to devalue the yuan – whose daily reference rate is being set by the government – was seen by many as an intervention to arrest the slowdown of the world’s second largest economy.

Since China is mostly export-driven, a cheaper currency will make its products cheaper and more attractive abroad, helping boost its exports, and ultimately its entire economy. China’s gross domestic product (GDP) grew seven percent in the second quarter, the slowest in six years.

Using data from 1990 to 2014, Beltran also found out that China’s slowdown has the smallest impact to the Philippine economy among its regional neighbors. In a separate economic bulletin, it was shown that a one-percent drop in Chinese GDP will only reduce Philippine GDP by 0.06 percent.

Within the five biggest economies in South East Asia, Singapore would suffer the most from a China slump, with one-percent reduction in mainland’s GDP cutting the city state’s GDP by 0.68 percent.

It was followed by Indonesia (0.474 percent), Vietnam (0.447 percent), Thailand (0.400) and Malaysia (0.294 percent). Outside the so-called Asean-5, South Korea will bear the least impact (0.08 percent), while Hong Kong will suffer the most (0.615 percent).

Beltran cited the largely domestically driven Philippine economy as reason for the country’s insulation. In addition, foreign sources of income from China such as exports and remittances are too small. In 2014, shipments to China accounted for just 11 percent, while remittances from it were only 0.1 percent of the total.

Emilio Neri Jr., an economist at Bank of the Philippine Islands, agreed: “There is indeed some degree of insulation for the Philippines,” he said in a phone interview.

The politics

How will this work for the Philippines on how it deals with its territorial dispute with China is, however, another thing. Among Asian nations, the country has been the most vocal against the mainland’s supposed aggression in the region.

Vietnam, while voicing support for the Philippines on its arbitration case, has fallen short of filing its own, while South Korea, which has its separate island dispute with China, has refrained from castigating its primary source of tourists at a time its economy is failing.

Among other Asean members, Malaysia and Cambodia, though not claimants to any islands in the disputed sea, have stopped the grouping from taking a united front against China during each of the country’s hosting of the Asean meetings.

Richard Javad Heydarian, a political scientist from De La Salle University, said while the country is indeed “less reliant” on China compared to its peers, the country also suffered some economic costs as a result of its hostile attitude to China.

He cited the country’s exclusion from the Maritime Silk Road being led by China to address the region’s infrastructure woes. In addition, as if mindful of the connection between political and economic power, the Philippines itself has not yet decided whether to join the China-led Asian Infrastructure Investment Bank, where countries with similar island disputes such as Korea and Vietnam are already members.

“Clearly, geopolitical and economic factors are interrelated when it comes to Philippine-China relations,” he said in an e-mail.

Casiple said there is no doubt part of the Philippines’ resolve to pursue its case versus China is on the back of economic reasons.

“However, we should make sure that this dispute does not define our relationship with China. We need to learn how to harmonize our economic and political interests,” he explained. “Our relationship should be multi-dimensional.”

Heydarian agreed, noting other countries in dispute were able to “maintain high-level dialogue and robust economic relations” with China, including Japan and even the US.

“The upcoming APEC summit in Manila is perhaps a good opportunity for some icebreaker exchanges between (President) Aquino and Xi Jin Ping, whereby the two leaders can focus on areas of shared interests without the Philippines sacrificing its legitimate rights in the WPS (West Philippine Sea),” Heydarian explained.