Beneath The Surface: China’s Subtle, Tightening Grip On Filipino Affairs Published May 25, 2023 By Lt Col William D. Yoakley, USAF The Indo-Pacific region is a hotly contested arena where China and the United States vie for influence. Nowhere is this struggle more evident than in China's backyard, the South China Sea (SCS). Like picnic goers tip-toeing past a bee-infested trashcan, many smaller and developing countries of the Indo-Pacific region work very deliberately to maintain a semblance of autonomy and sovereignty in a way that does not disturb China. The Philippines is no different. Like many in the ASEAN neighborhood, China is slowly incorporating the Philippines into its beehive in a subtle but systematic way. From real estate to telecommunications, infrastructure projects to mineral extraction, China invests time, money, and resources into the Philippines and builds inseverable associations with critical services. China's growing presence and investment in the Philippines, particularly in the realms of telecommunications and power transmission, has given the Chinese tremendous influence that can pose a significant risk to Filipino security and US interests in the region. Background The United States has a strong interest in the security of the region. President Biden’s National Security Strategy (NSS) characterizes the People’s Republic of China (PRC) as “the pacing challenge,” and the Indo-Pacific theater as the “epicenter of 21st century geopolitics.” The Philippines is one of only five US treaty allies within the theater and has a front-row seat to Great Power Competition in the South China Sea (SCS).[1] The SCS supports roughly two-thirds of all global maritime trade and is arguably the raison d'être for staunch US rhetoric aimed at free and open seas. China's nine-dash line, claims of historical sovereignty over islands, the militarization of rock formations, and disputes with nearly every nation that borders the body of water threatens the global economy and the liberal institutions that govern world order. In the eyes of the US, China is not a benevolent or responsible actor on the world stage. Instead, the US sees the PRC as increasingly having both the latent power and intent to change the world order in a way that suits its autocratic regime at the cost of everyone else.[2] The Philippines' location and historical ties with the US make the US-Filipino relationship one of strategic national importance. This relationship also demonstrates the US resolve to other regional partners, a fact that is not lost on Beijing or President Xi Jinping. Since taking office in June 2022, President Ferdinand “Bongbong” Marcos Jr. has attempted to use this strategic rivalry to the Philippines’ advantage. His foreign policy strategy of “being a friend to all and an enemy to none” has aimed to balance economic support from China with military support from the United States.[3] In an attempt to downplay maritime frictions in the SCS (synonymous with the West Philippine Sea in Filipino circles), President Marcos solidified 14 cooperation agreements during a landmark visit to Beijing in January 2023, which included an updated Belt and Road Initiative (BRI) memorandum and funding for bridges and other infrastructure projects in the Philippines.[4] In total, President Marcos secured over $22 billion in investment and trade deals.[5] Less than a month later, the US and the Philippines agreed to expand the Enhanced Defense Cooperation Agreement (EDCA), providing the US military access to four additional bases on top of the five already granted in the original 2014 agreement, spread across Luzon (the northern island), Palawan (western-most island), and the central Visayas.[6] A shared US and Filipino vision is that the increased access and cooperation at these various EDCA sites will increase the country's investment opportunities and employment. Beijing's stance is best illustrated in a response from the Chinese Embassy in the Philippines – "Creating economic opportunities and jobs through military cooperation is tantamount to quenching thirst with poison and gouging flesh to heal wounds.”[7] Despite the rhetoric, the Marcos administration must preserve the political balancing act. China’s enormous market remains the Philippines' most prominent export and import partner, though the US and other Western-leaning countries do not trail far behind. While sixteen percent of Philippine exports go to China, 15 percent of its exports head to the US.[8] Comparatively, China has a predominant lead in imports to the Philippines, with twenty-nine percent of Filipino imports coming from China (mostly refined petroleum and integrated circuits) and only six percent from the US (mostly integrated circuits and wheat).[9] China’s eagerness and generally lower sticker price for investment and infrastructure projects is an enticing prospect for the continued development of the Philippines. However, defense cooperation with the US has a long legacy and provides necessary sovereignty guarantees in the face of increased PRC activities in the SCS. Therefore, it is no surprise to see a simultaneous influx of Chinese investment and infrastructure projects alongside deepening partnerships with the US. The Chinese have been deepening their ties in the Philippines' critical infrastructure. Beyond the construction projects of transportation infrastructure, such as bridges, roads, and rail lines, Chinese companies have found a way to gain large shares in Filipino utility companies. Most notably, Chinese companies own a 40 percent stake in both the National Grid Corporation of the Philippines (NGCP) and Dito Telecommunity.[10] Both of these arrangements should cause concern as the Chinese companies are owned by the PRC and, by extension, the Chinese Communist Party (CCP). The NGCP is a consortium of three companies in charge of “operating, maintaining, and developing the country's state-owned power grid.” While two Filipino companies, Monte Oro Grid Resources Corporation and Calaca High Power Corporation each own 30% of the NGCP, the remaining 40% is owned by the State Grid Corporation of China (SGCC). In 2008, NGCP secured a 50-year franchise from the Congress of the Philippines to manage the state power grid, focused on operating, maintaining, and developing transmission capabilities. NGCP maintains that SGCC's role remains one of "technical partner," a caveat peculiarly placed throughout the company's website adjacent to any mention of SGCC.[11] Despite this caveat, a leaked report in 2019 highlighted that through the SGCC, the PRC could theoretically kill power throughout the Philippines power grid “with a single switch,” requiring 24 to 48 hours to revert the grid to manual operations.[12] Whether this is factual or just speculative paranoia remains unverified, but it is not a position where any country would desire to be. Equally troubling is the large Chinese interest in Dito Telecommunity, which is one of three companies providing broadband internet and cell service in the Philippines. Dito Telecommunity is another consortium comprised of the Udenna Corporation and its subsidiary Chelsea Logistic Corporation (60 percent share, Philippines) and China Telecommunications Corporation (China Telecom, 40 percent share, China). In 2018, Dito Telecommunity won a bid to provide Filipinos with a third 5G broadband and cell network option to provide additional competition to a market dominated by PLDT-Smart and Globe.[13] This is troubling as China Telecom reports directly to China's Ministry of Industry and Information Technology, making it an extension of the PRC. An investigative report produced by Creator Tech, an Asia Pacific consulting firm, found that China Telecom reports intelligence directly to the PRC and describes itself as “a main force for building cyber power.”[14] Irregularities in the bidding and selection process and the inclusion of China Telecom as a significant partner also raise suspicion of corruption at the highest levels of the Philippine government. To top it all off, this potentially corrupt transaction, with a PRC-owned company holding a 40 percent share, signed a deal with the Armed Forces of the Philippines to provide internet connectivity at military installations.[15] If control of the power grid was insufficient, China's telecommunications ventures on the islands generate an enormous espionage vulnerability. Chinese economic involvement in the Philippines, therefore, has obvious implications for US security interests in the Philippines. Should the US ever need to operate from EDCA sites, both power and internet connectivity may not be reliable or secure. While these risks can be easily mitigated for the United States with portable power generators and US satellite-based communication capabilities, the ability to securely share sensitive and classified information between the US and the Philippines could be compromised. Although various investments in stand-alone intelligence-sharing platforms could mitigate any information leakage concerns to adversaries, this would still leave much of the Philippines vulnerable to Chinese interference, which China could leverage against the Philippines to complicate US-Filipino relations, disrupt combined exercises, slow disaster relief operations, sabotage US or western-based investments or businesses, etc.. There are some who would claim that these concerns are alarmist or based on pure speculation. Pointing to the globalized nature of SGCC and China Telecom, these critics believe that concern for the companies' reputations would limit their actions. Were the Chinese companies to somehow use their interconnectedness for political advantage, blackmail, espionage, or sabotage, they would inevitably destroy their lucrative global business model, where the SGCC had $461 billion and China Telecom had $64.3 billion in global revenue in 2021.[16] Others argue that China is too leveraged in other markets to risk losing profits over small gains in a place like the Philippines, as SGCC has an 80 percent stake in Brazil's power grid and stakes ranging from 20 to 60 percent of various Australian power grids.[17]However, these arguments must consider the depth to which many other countries already rely on China for trade, industry, or infrastructure. While some may consider the Chinese corporations overleveraged, others could counter that China has diversified enough. Furthermore, it is very difficult to attribute any actions to China, which could maintain enough plausible deniability to conduct "gray zone activities" through these state-owned companies. China has already used its economic power to influence Filipino policy. Immediately following territorial disputes over Scarborough Shoal in 2012, China stopped buying bananas from the Philippines. While China officially asserted that the banana shipments contained pest infestations, the timing was suspicious at best.[18] Again in 2016, amid hearings related to SCS disputes in the International Court of Arbitration, China again banned banana imports from the Philippines, only to lift the ban after President Rodrigo Duterte expressed anti-US and pro-China sentiments.[19] Therefore, China’s ability to exert political pressure over several hundred million dollars worth of bananas should be a bright red flag to those not skeptical of China’s dormant influence in both the electrical and telecommunications sectors. As the Philippines works hard to pull itself into the 21st century, the US has an opportunity to improve relations. The Philippines justifiably seeks to capitalize on investments from both countries as they are just recognizing their strategic location for both their long-time defense ally, the US, and the regional hegemon, China. While the US is often warning other countries of the security risks associated with Chinese investment, it also neglects to offer affordable alternatives. To paraphrase various officers within the Philippine Air Force, “China brings cash and the US brings lectures.”[20] However, according to the US embassy in the Philippines, despite China pouring cash into the country, the overwhelming majority of the population strongly favors a US partnership over China.[21] Many criticize China for providing inadequate equipment and substandard service. For example, Mr. Roy Lamdagan, President and CEO of JEDDTECH Corporation, a Philippine-owned and operated technology company, divulged that his company must often rewire or reinstall electronics supplied by SGCC due to substandard conditions upon arrival in the Philippines. Furthermore, he indicated that the equipment rarely, if ever, includes instruction manuals written in any language other than Chinese. Ultimately, electricity and telecommunications form a bedrock for a country to develop. Both are vital for successful governance and economic growth in the 21st century. While China is capitalizing on the Philippines' desire to grow quickly and on a limited budget, the US is offering little more than warnings and lectures. Meanwhile, the Philippines are attempting to balance Chinese threats to the rich resources in the West Philippines Sea with security guarantees from the US. It remains to be seen if Marcos can keep up this balance. There is always the chance that increased US military cooperation could tip the balance of power in the region, while China has embedded itself into vital Philippine utilities that could leave the government and population vulnerable to outside disruption. As the Philippines and the US seek to increase interoperability and partnership in the theater, there should be a genuine concern for the potential control China could exert on the Philippines through the power grid and telecommunications sector. By taking advantage of discontent with the poor quality of Chinese assistance or imports, there is a tremendous opportunity for the US to increase its investment in the Philippines. Not only would this help develop the country, but also secure a regional partner. Lt Col William D. Yoakley, USAF Lt Col Yoakley has served in a variety of roles in the INDOPACIFIC, AFRICOM, and CENTCOM theaters. He is currently transitioning from Air University's Air War College to Pacific Air Forces Headquarters, where he will continue a rich family history of service in the Pacific that began during WWII. NOTES [1.] White House, National Security Strategy of the United States of America (Washington, DC: White House, 2022), 37-38. [2.] Ibid., 23. [3.] Lucio Blanco Pitlo, III., “The Significance of Philippine President Marcos’ Visit to China,” China-US Focus, (Hong Kong: January 31, 2023), https://www.chinausfocus.com/foreign-policy/the-significance-of-philippine-president-marcos-visit-to-china. [4.] Yin Yeping, “China, Philippines ink updated MoU on BRI to boost cooperation in infrastructure, other areas,’ Global Times, January 05, 2023, https://www.globaltimes.cn/page/202301/1283278.shtml. [5.] Richard Javad Heydarian, “A New Era: Marcos Jr. Visits China to Bolster Cooperation,” China-US Focus, January 31, 2023, https://www.chinausfocus.com/foreign-policy/a-new-era-marcos-jr-visits-china-to-bolster-cooperation. [6.] Peng Nian, “Can Manila Keep Its Balance?,” China-US Focus, February 6, 2023, https://www.chinausfocus.com/foreign-policy/can-manila-keep-its-balance. [7.] Tristan Nodalo, “’Endangering Peace’: China warns PH over EDCA expansion plans with US,” CNN Philippines, March 10, 2023, http://www.cnnphilippines.com/news/2023/3/10/China-warns-Philippines-EDCA-United-States.html. [8.] Central Intelligence Agency, “Philippines,” The World Fact Book, (Washington, DC: 22 Mar 2023). https://www.cia.gov/the-world-factbook/countries/philippines/#economy [9.] Observatory of Economic Complexity, “Philippines,” OEC, Aug 2021, https://oec.world/en/profile/country/phl?subnationalFlowSelector=flow1&yearlyTradeFlowSelector=flow0 [10.] Ray Lamdagan (President and CEO, JEDDTECH Corp.) in discussion with the author, March 8, 2023; National Grid Corporation of the Philippines (NGCP), “Corporate Profile.” https://www.ngcp.ph/profile; JC Punongbayan, "[Analysis] China's creeping influence in PH telco, electricity, water," Rappler, February 20, 2020, https://www.rappler.com/voices/thought-leaders/252250-analysis-china-creeping-influence-philippine-telco-electricity-water/. [11.] NGCP, “Corporate Profile.” [12.] James Griffiths, “China can shut off the Philippines’ power grid at any time, leaked report warns,” CNN, November 26, 2019, https://edition.cnn.com/2019/11/25/asia/philippines-china-power-grid-intl-hnk/index.html [13.] Punongbayan, "[Analysis] China's creeping influence.” [14.] Creator Tech, “A Study into the Proposed New Telecommunications Operator in the Philippines: Critical Success Factors and Likely Risks,” (2 Oct 2020), 8, https://newsbytes.ph/wp-content/uploads/2020/10/Creator-Tech-Study-compressed.pdf. [15.] Paterno Esmaquel, II, “China defends experts in Philippine power firm,” Rappler, March 04, 2015, https://www.rappler.com/nation/85709-china-philippines-power-firm-ngcp/ [16.] Fortune, “State Grid: Global 500,” Fortune.com, 2022, https://fortune.com/company/state-grid/global500/; “Revenue for China Telecom (0728.HK),” CompaniesMarketCap.com. https://companiesmarketcap.com/china-telecom/revenue/ [17.] Lucio Blanco Pitlo, III., “China in the Philippine Power Grid: Need for Caution not Alarmism,” China-US Focus, January 17, 2020, https://www.chinausfocus.com/foreign-policy/china-in-the-philippine-power-grid-need-for-caution-not-alarmism-. [18.] Kesha West, “Banana crisis blamed on Philippines-China dispute,” Newsline, June 28, 2012, https://www.abc.net.au/news/2012-06-29/an-banana-exporters-caught-in-philippines-china-dispute/4100422. [19.] “China to lift import bans on Philippine fruit companies,” Freshfruitportal.com, October 10, 2016, https://www.freshfruitportal.com/news/2016/10/10/china-to-lift-import-bans-on-philippine-fruit-companies/. [20.] Casual comments made by various leaders on condition of anonymity at the Philippine Air Force headquarters, March 06, 2023. [21.] Nina Lewis (Cultural Affairs Officer, US Embassy in the Philippines) in discussion with the author, March 6, 2023.