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O 280613Z APR 08
FM AMEMBASSY MANILA
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RUEHGH/AMCONSUL SHANGHAI IMMEDIATE 0064
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UNCLAS SECTION 01 OF 04 MANILA 000998 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
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 
AIT TAIPEI PASS TO KAOHSIUNG 
 
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 
 
MANILA 00000998  001.2 OF 004 
 
 
¶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 
 
MANILA 00000998  002.2 OF 004 
 
 
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 
 
MANILA 00000998  003.2 OF 004 
 
 
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 
 
MANILA 00000998  004.2 OF 004 
 
 
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