October 28, 2016
Roy I. Ramos, [email protected] MoneyTalks Dante R. Tinga, Abi Chiw, Dennis Carreon Thomas Huang, Angelo Torres, Hazel Yap
Part 2.1: China pivot and c.US$28.5bn in agreements – infra kickstart + multiplier effects; many pointers to take away from China’s reform wins
Agreements are wide-ranging and sizable in relative, absolute terms China (and Philippines): President Duterte’s China trip and inked agreements compel us to write this unplanned follow-on piece, given the size, scope and span of the (1) c.US$13.5bn of govt-to-govt some key numbers MOUs/agreements and (2) follow-on business agreements (c.US$15bn announced 1.0X | 2.7X to date, perhaps more ahead given the c.300+ Phil corporate execs that joined this Beijing trip). Ave per capita income for China vs Phil, in 2000 | in 2015 Likely multiplier effects and potentially significant new jobs While much hinges on improved pace and quality of implementation, the focus on hard 120 million infrastructure, combined with China’s strengths and track record herewith, can lead No of outbound China tourists, 2015 to significant multiplier effects and jobs creation, estimated by the Phil govt at c.2mn new jobs over the next 5 years, close to a third of the c.5.5mn new jobs we believe the US$215bn | US$1,790 country will need to create over that same period (c.1.1mn/year, versus the 620k/year Chinese tourists total overseas spend in 2015; run-rate of late). ave spend per China tourist Beyond the political rhetoric, 1: China has the reform/infra track record 490k | 7.9mn While there is net skepticism over China from the public, we believe there is much No of Chinese tourists in 2015 going to to pick up from China as arguably the world’s biggest reform/growth/infra build-out Philippines | Thailand success story in past 3 decades. It also has many needs/wants (food supply stability/ safety, tourism, go- overseas drive for its corporates) that the Philippines can compete 4% | 38% for, up its game on. % of Chinese with passports; Beyond the rhetoric, 2: China arguably a highly relevant partner/role model % of Americans with passports While there have been wide concerns over the president’s US separation comments 20mn | 8mn (since clarified as refocusing of priorities not severing of US ties, a welcome move), we stress that China is in some key ways a more relevant role model/mentor for Phil No. of new jobs & new housing units given our stage of development and set of challenges. China per capita incomes were China created each year from 2000-2010 the same as Phil in 2000 but now 2.7X higher. At least 8 of the Duterte 10-point econ to meet basic job/housing needs program were core parts of China’s reform success, i.e. we should see how/why this movie played out well in China. 840mn Ú 84mn No of Chinese people living in absolute Other China-related opportunities: infra expertise, agri exports, tourism poverty per World Bk, 1981 and 2011 We point to other China-related opportunities: tapping into its infra build-out expertise, exporting agri products (e.g. fruits, coconut) and tourism. In 2015, out of 120mn total 2.8X | 4.1X outbound tourists from China, 490k went to Phil, vs. 7.9mn to Thailand and 1.3mn to Urban incomes as % of rural incomes, Indonesia. Note only c.4% of Chinese have passports at present vs c.38% for US; imagine China | Philippines the global/local impact when this proportion triples or quintuples as is likely in time. US$3.0bn Ú US$5.0bn Issues/risks to watch China fresh fruit imports total, 1. US/Europe FDI/investor impacts: we agree with many that a pivot to China, that 2012 | 2015 focuses on infra, econ/trade ties as the President clarified, should not be at expense of US/Euro ties. 42nd | 95th 2. Quality/pace of implementation: converting all these MOUs from agreements to tangible wins or implementing Php 8.2tln of infra projects over 6 yrs as the gov’t has World Economic Forum infrastructure ranking set out to do will require focus, commitment and more urgency and consistency of out of 138 countries for execution than typically seen to date, just using the small example of the years-long China | Philippines still-unresolved delay in releasing new car license plates and securing new/more reliable suppliers for such.
DISCLAIMER: The information, opinions and analysis contained herein are based on sources and data believed to be reliable but no representation, expressed or implied, is made as to its accuracy, completeness or correctness. This material is only for the general information of the authorized recipients. In no event shall BDO or its officers and employees, including the author(s), be liable for any loss/damage resulting from reliance, directly or indirectly, or information found within this report. October 28, 2016 BDO Unibank
Notable quotes
ON BUILDING UP INFRASTRUCTURE, THE COUNTRY’S STOCK OF CAPITAL In short, the biggest single task for China over the past thirty-five years was to increase its capital stock: the total value of equipment, buildings, and other forms of physical capital… The primary job for any country that wants to move from poor to rich is therefore to increase its capital stock to a degree approaching rich-country levels…
It is more vital for poor countries to focus on putting in as much appropriate capital as possible than to try to maximize the marginal productivity of each individual project – so long as they have functioning market institutions, a decent labor force, a reasonable standard of governance, and economic policies that create a predictable investment environment for businesses. Under these conditions, most new capital investments are likely to generate very large returns quite quickly, thanks to the ability of infrastructure and new technologies to dramatically boost productivity from its very low starting base. This is the advantage of “backwardness”.
ON CHINA INVOLVEMENT IN OTHER COUNTRIES Generally speaking, China takes the position that its involvement in other countries is purely economic, and it maintains a principle of non-interference in the internal political affairs or other nations… There is as yet no hard evidence that China has either the desire or the ability to dictate or preach to other countries how they should organize their political or economic systems – a prerogative that the United States frequently asserts.
ON CHINA AS ROLE MODEL FOR DEVELOPING COUNTRIES (LIKE THE PHILIPPINES) Former World Bank chief economist Justin Yifu Lin is correct to observe that to the extent poor countries seek models, they are better off looking at other recent development success stories than at rich countries. This simple point was often forgotten by neoclassical economists and development agencies like the World Bank in the 1990s, when poor countries were often told that stronger property rights, freer markets, and more open financial systems – essentially the luxuries that rich countries obtained after centuries of development – were their key to progress. China’s success has reminded us of the crucial importance of infrastructure, pragmatic industrial policies, and an appropriate role for the state in maintaining a stable investment environment.
- Arthur R. Kroeber, China’s Economy: What Everyone Needs to Know, 2016 Founding Partner, Gavekal Dragonomics, a China focused economic research firm in Beijing, senior non‑resident fellow at Brookings-Tsinghua Center for Public Policy, and member of National Committee on US-China relations.
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Backdrop to Part 2.1
In Part 1 of this series (“Thinking of 3 baggers, 30 baggers and beyond: The power of compounding, patience, and stockpicking”, July 28, 2016), we noted that a confluence of positive factors on many fronts led to:
• a virtuous circle of rising GDP growth for the Philippines over the past decade • a tripling of the PCOMP index (i.e. a 3-bagger) in that same period (from Oct 2006 to now) • the rise of many 3-baggers (share price up 3X), 30 baggers (30X) and beyond among listed corporates in the past 8-15 years (Exhibits 1 and 2).
In Part 2 (“Reforms + multiplier effects = double for GDP since 2002, triple for PCOMP since Oct 2006. Mean reversion, or continued gains from here?”, October 11, 2016), we opined that gains would continue, but stressed that infra and reforms progress must sustain, to create all the needed jobs as the country’s working-age population continues to swell, and to achieve more inclusive growth.
President Duterte’s October 18-21, 2016 China trip and inked agreements while there compel us to write this “unplanned” follow-on Part 2.1 piece, given the size, scope and span of the (1) c.US$13.5bn1 of govt- to-govt MOUs/ agreements and (2) follow-on private sector agreements (c.US$15bn announced to date, perhaps more ahead given the c.300+ Phil corporate execs that joined this Beijing trip).
Our conclusion
We keep it short with this follow-on piece.
We’ve already laid out all our key points on the front cover of this piece. To sum up:
• Agreements are wide-ranging in scope, and sizable in absolute and relative terms. • Multiplier effects and significant new jobs creation are likely. • Beyond the political rhetoric, 1: China has the reform/infra track record, that is particularly relevant for developing countries including the Philippines. • Beyond the political rhetoric, 2: China arguably a highly relevant partner/role model for economic development and infrastructure build-out. • There are likely to be other China-related opportunities, including tourism and agribusiness/exports. • A pivot to China, with a focus on econ development, infra and trade, should not come at expense of US or European ties. • Quality and pace of implementation are key, if in-principle agreements and the government’s Php8.2tln of planned infra spending in the next 6 years actually become tangible achievements with significant multiplier effects.
In the rest of this report, we (1) summarize key elements in China’s reform successes, (2) detail the key China/Philippine announcements made, and (3) present charts that support our views that China is a highly relevant partner/role for economic development in a number of ways, (4) highlighting other potential opportunities that may open up, in particular infra build-outs, tourism and agriculture exports.
We also reproduce the 47-point Philippines and China joint statement released during the state visit of President Duterte. The joint statement is remarkable in the breadth of areas covered.
Successfully implementing just a fraction of these 47 points can only be economically and incrementally beneficial for the Philippines.
1 Initially estimated by the government at US$9bn, subsequently revised to US$13.5bn, as articulated by Department of Trade & Industry Secretary Ramon Lopez, among others.
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Key underlying premise: China as world’s biggest infra/reforms success in past 3 decades
China’s progression over the past 30 years has been a remarkable success on a broad number of fronts propelling the country from sleeping giant to now the world’s second largest economy (and largest on an increasing number of metrics such as export and overall trade volumes, car sales, mobile/data subscriptions and consumption of many key materials).
Much of this path to success started top-down with government policies, reforms and initiatives (henceforth taken up and capitalized on by China’s corporates and consumers), including:
• Market-based economy. Deng Xiao Ping’s pivot towards a more market-based economy in the 1980s • It started in Shenzhen. Deng Xiao Ping’s launch of experimental economic reforms with the launch of the special economic zone in Shenzhen in the 1980s • SOE reforms. Premier Zhu Rongji’s SOE reforms in the 1990s (including shutdowns, layoffs, downsizings, consolidation and dismantling of the “iron rice bowl” jobs-for-life social compact) • Public listings of reformed SOEs starting in the mid-1990s (first telcos, then insurers and banks2, power companies, etc) • Jobs creation. A focus on creating enough jobs to accommodate the rise in the working age population and the migration of rural workers to urban centers • A focus on getting FDI (foreign companies setting up assembly/manufacturing operations) in China, which in turn created more jobs by mobilizing cheap abundant labor, introduced more advanced technologies to the country, increased exports and FX reserves etc. • Pool of savings. Use of the banking system and regulated deposit pricing policies to build up a huge pool of deposits/domestic savings (rising to c.200% of GDP, versus c.55% for the Philippines) • Hard infrastructure. Using that pool of accumulated savings (as well as the government balance sheet) to continuously build up hard infrastructure across the country, including roads, bridges, ports, airports, a national power grid, defense/military capabilities • Creation of a modern property and mortgage market in the late 1990s, in turn creating a massive transfer of wealth and increase in asset values/consumer wealth and spending power • Urbanization of rural areas • Mass movement of labor migrants from rural areas to urban centers • Hukou (residency permit) reforms for labor migrants • Soft skills. Significant investments in education, R&D, health care and social safety nets/pension schemes • Mobile/broadband. Creating a nationwide internet backbone and mobile broadband infrastructure, in turn enabling the growth of a now vibrant and innovative internet/mobile ecosystem (e.g. Tencent, Baidu) and e-commerce businesses (e.g. Alibaba, Alipay, Tenpay, JD.com, Didi and a whole range of niche/vertical apps that rival offerings from Silicon Valley).
In many ways, all these China achievements are well known and chronicled with self-evident takeaways and lessons, so we stop here, other than to refer you to Exhibit 4 for a summation and comparison with Thailand, India and the Philippine’s 10-point economic program. We also refer you to a just-published book by Arthur Kroeber titled “China’s Economy: What Everyone Needs to Know”.3 The excerpts on page 2 of this piece are from this book.
2 The lead author was involved in the IPO listings of many of China’s insurance companies and banks as the HK-based pan-Asia head of financials research for a US investment bank. 3 Arthur R. Kroeber is Founding Partner, Gavekal Dragonomics, a China focused economic research firm in Beijing, a senior non- resident fellow at Brookings-Tsinghua Center for Public Policy, and a member of National Committee on US-China relations. His latest book titled “China’s Economy: What Everyone Needs to Know” is one of the most authoritative, comprehensive, thoughtful and balanced (as opposed to unmitigatingly critical) assessments of China in the lead author’s view.
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Exhibit 1: 13 government-to-government MOUs (Memorandum of Understanding) with China tagged by Philippine government at US$13.5bn Covered areas of cooperation include trade, agriculture, tourism, maritime security and infrastructure. 1 Agreement on Economic and Technical Cooperation between Philippines and China 2 Memorandum of Understanding between National Economic & Development Authority of Philippines and National Development & Reform Commission of China for Developing Cooperation on Production Capacity and Investment 3 Memorandum of Understanding between Department of Transportation and Department of Public Works and Highways of Philippines and the National Development and Reform Commission of China on Transportation Infrastructure Cooperation Project List 4 Memorandum of Understanding between the Department of Trade and Industry of Philippines and Ministry of Commerce of China on Strengthening Bilateral Trade, Investment and Economic Cooperation 5 Memorandum of Understanding between the National Economic and Development Authority of Philippines and the Ministry of Commerce of China on Formulation of Development Program for Economic Cooperation 6 Memorandum of Understanding between the Department of Finance of the Republic of the Philippines and the Ministry of Commerce of the People’s Republic of China on Supporting the Conduct of Feasibility Studies for Major Projects 7 Action Plan on Agricultural Cooperation between Department of Agriculture of Philippines and the Ministry of Agriculture of China 2017‑2019 8 Memorandum of Agreement between the State Council Information Office of China and Presidential Communications Operations Office of Philippines on News and Information Exchange, Training and for other Purposes 9 Memorandum of Understanding between Department of Agriculture of Philippines and General Administration of Quality Supervision Inspection of China on Cooperation of Animal and Plant Inspection and Quarantine 10 Memorandum of Understanding between Philippine Coast Guard and China Coast Guard on Establishment of a Joint Coast Guard Committee on Maritime Cooperation 11 Implementation Program of Memorandum of Understanding on Tourism Cooperation between Department of Tourism of Philippines and the National Tourism Administration of China 2017-2022 12 Protocol on Cooperation between Philippines Drug Enforcement Agency and the Narcotics Control Bureau of the Ministry of Public Security of China 13 Memorandum of Understanding on Financing Cooperation between Export-Import Bank of China and Government of Philippines, represented by Department of Finance Source: Philippine government.
Exhibit 2: List of companies signing US$3 billion credit facility from Bank of China 1 JG Summit Holdings 2 Filinvest Development Corp 3 Metro Pacific Investment Corp 4 SM Investment Corp 5 International Container Terminal Services 6 Ayala Corp 7 Pan Pacific Renewable Power Philippines Corp 8 Undenna Corp Source: Philippine government.
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Exhibit 3: List of investment projects/business agreements signed during President Duterte China trip in October Value of signed business agreements estimated by Philippine government at US$15bn. 1 Subic-Clark railway project by Bases Conversion and Development Authority (BCDA) and China Harbour Engineering Co. 2 Bonifacio Global City-Ninoy Aquino International Airport Segment of Metro Manila Bus Rapid Transit-EDSA project by BCDA and China Road and Bridge Corp. 3 BCDA-China Fortune Land Real Estate project (memorandum of understanding); 4 Safe and smart city projects for BCDA by BCDA and Huawei Technologies 5 Transportation and logistics infrastructure at Sangley Point by Cavitex Holdings, International Container Terminal Services Inc. and China Harbour Engineering 6 Joint venture agreement of Jimei Group of China and Expedition Construction Corp. for infrastructure projects 7 North Negros biomass and South Negros biomass project by North Negros Biopower and Wuxi Huaguang Electric Power Engineering 8 Globe Telecom projects to improve network quality and capacity 9 Jin Jiang hotel room capacity expansion from 1,000 to 2,000 by Double Dragon Properties and Hotel of Asia Inc. 10 Joint development project on renewable energy by Columbus Capitana and China CAMC Engineering 11 New Generation Steel Manufacturing Plant by Mannage Resources and SIIC Shanghai International Trade HK; 12 Joint venture on steel plants by Global Ferronickel and Baiyin International 13 Renewable energy projects by Xinjiang TBEA Sunoasis 14 Davao coastline and port development project by Mega Harbor Port and Development and China Harbour Engineering; 15 Manila Harbour Center reclamation by R-II Builders Inc. and China Harbour Engineering 16 Cebu International and Bulk Terminal project by Mega Harbour Port and CCCC Dredging Company 17 Cabling manufacturing facilities by MVP Global Infrastructure Group and Suli Grp Ltd. 18 Manila EDSA Bus Transportation program by Phil State Group and Yangtse Motor group and Minmetals International 19 Hybrid rice production by SL Agritech and Jiangsu Hongqi Seed Inc. 20 Bus manufacturing facility by Zhuhai Bus and Coach Co. 21 Banana plantation project by AVLB Asia Pacific and Shanghai Xinwo Agriculture Development Co. 22 300MW Pulangi-5 Hydro Project by Greenergy Co. and Power China Guizhou Engineering Corp. 23 Pasig River, Marikina River and Manggahan Floodway bridges construction project by Zonar Construct and SinoHydro; 24 Ambal Simuay sub-river basin flood control project by One Whitebeach Land Development and Sino Hydro; 25 Nationwide island provinces link bridges by Zonarsystems and PowerChina Sino Hydro; and 26 Railway project (study) by MVP Global Infrastructure group and China Railway Engineering Corp. Source: Philippine government.
Exhibit 4: Per capita incomes for China vs. Philippines: from rough parity in 2000, to 2.7X that for Phil in 2015: we should see how/why this movie played out well/better in China, and figure out key takeaways Per capita incomes, in US$
9000
8000
7000 Philippines 6000 China
5000
4000
3000
2000
1000
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201320142015
Source: World Bank.
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Exhibit 5: Why we think China is an apt/relevant partner for Philippine economic development and infra build-out, at this stage of our development cycle We point out that at least 8 of the government’s 10-point economic program are core parts and key wins of China’s reforms/growth success in past 3 decades
Philippine 10-point econ plan China reform efforts Thailand reform efforts India reform efforts
1 Continuity and beyond, reduce tax evasion, President Xi Jinping anti-corruption drive, Similar war on drugs started by Thaksin in 2003, Not particularly noteworthy smuggling, corruption Premier Zhu Rongji SOE reforms beforehand. debatable long-term effects, similar issues with extrajudicial killings.
2 Tax reform Significant local govt fiscal reforms, but less Not particularly noteworthy Recently enacted move from local to nationwide/ relevant for Phil. Note that China local govt share unified VAT system of revenues very high at 40% vs 19% for OECD.
3 Infrastructure build-out V. significant focus over past 2 decades, esp in Ports, road, airports buildout key to takeoff of Increasing focus over past 10 yrs less developed rural areas, drive to urbanize. manufacturing, FDI, tourism Invest spend > 50% of GDP for years. Urban pop'n rose from 172mn in 1978 to 731mn in 2013.
4 More foreign & local direct investments V. significant focus over past 3 decades starting Very significant/focus and success over past 2 Prime Minister Modi "Make in India" drive, offset with Shenzhen as special econ zone: China decades - Japan FDI in particular, manufacturing however by continued barriers to FDI in several now as FDI-fueled manufacturing workshop wins including automotive industry sectors, e.g. retail of the world, e.g. center of Apple/smartphone/ electronics ecosystem.
5 Pursue agriculture development and tourism Core part of rural reforms (move to family V. significant focus & success over past 2 decades Limited progess, agri sector/monsoons as farming) in hand with urbanization of rural areas. in infra/market access build-outs, value added traditional source of macro volatility Agri product price and market opening reforms. agri exports and tourism, "grown in Thailand" Build-up of rural roads, infra, food processing brand plants, mechanization, higher-yield crops.
6 Land reform Establishment of farmer self-owned cooperatives Limited progress Limited progress in 1980s; massive wealth transfer/creation with transfer/privatisation of erstwhile state owned urban housing and creation of residential mortgage market in 1990s.
7 Strengthen education/skills Near-universal access to internet in urban areas. Limited progress World class IIT and IIM graduate schools, IT Among the top in student math and science strengths aptitude tests. Beijing and Tsinghua Univ 2nd and 5th ranked universities in Asia in Times Higher Education rankings
8 Promote science & tech, creative arts Cutting edge tech advances, internet/e- Limited progress IT strengths, BPO success, Bollywood vibrance commerce leadership (e.g. Tencent, Alibaba, as world's largest film industry, several global Baidu), upgrade of key cities into "smart cities" tech firms headed by India CEOs (e.g. Google, (e.g. Beijing, Shenzhen, Shanghai) where Microsoft) specialization and innovation become key growth drivers
9 Expand/improve conditional cash transfer - Significant focus of late, including hukou Universal health care coverage in place via Limited progress safety nets reforms, pilot urban/rural pension schemes, several public and private schemes. Vibrant health care coverage, mandatory basic health private healthcare system including successful insurance. medical tourism.
10 Responsible parent/reproductive health One-child/urban household policy (now being Less applicable: Thailand now the oldest/fastest- Limited progress eased in phases, as China ages). ageing country in ASEAN
Legend: Significant focus/commitment Meaningful focus
Source: BDO Research estimates.
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Appendix: Joint statement of The Republic of the Philippines and the People’s Republic of China during the state visit of President Rodrigo Duterte to Beijing
1. At the invitation of H.E. President Xi Jinping of the People’s Republic of China, H.E. President Rodrigo Roa Duterte of the Republic of the Philippines undertook a state visit to China from 18 to 21 October 2016.
2. During the visit, President Rodrigo Roa Duterte and President Xi Jinping had a fruitful meeting in an amicable and friendly atmosphere and conducted in-depth exchanges on bilateral relations as well as international and regional issues of shared interest. H.E. Li Keqiang, Premier of the State Council, and H.E. Zhang Dejiang, Chairman of the Standing Committee of the National People’s Congress, met with President Rodrigo Roa Duterte. H.E. Zhang Gaoli, Vice Premier of the State Council, and President Rodrigo Roa Duterte also attended the opening ceremony of Philippines-China Economic and Investment Forum and delivered remarks.
3. Both sides acknowledge the centuries-old bonds of friendship of the two peoples. Both sides agree that the mutual understanding and friendship of the two peoples are important. Both sides will make concerted efforts to cement the traditional friendship of the two peoples.
4. Both sides agree that since the establishment of diplomatic relations, Philippines-China relations have enjoyed smooth development and remarkable progress in many areas of cooperation which have benefited both countries and peoples.
5. Both sides commit to further enrich Philippines-China bilateral relations, founded on mutual respect, sincerity, equality and mutual benefit, which is conducive to regional peace, stability and prosperity.
6. Both sides reaffirm the principles contained in the Philippines-China Joint Communiqué of 1975 and other documents, whose principles include, among others, the principle of the peaceful settlement of all disputes and the Philippines’ adherence to the One-China Policy.
7. Both sides affirm their partnership and their common aspiration to achieve sustainable development and inclusive growth that will benefit the peoples of both countries. Both sides agree that this is a milestone visit which will infuse new energy to bring tangible benefits to the peoples of the two countries. Both sides will work together to pursue the sound and stable development of the strategic and cooperative relationship for peace and development.
8. Both sides acknowledge the great importance of maintaining high-level exchanges in promoting the all-around development of bilateral relations.
9. Both sides welcome the signing during the visit of various agreements and Memoranda of Understanding (MOU), as listed in the Annex.
10. Both sides express interest in finalizing agreements and MOUs in such areas as education, finance, customs and sports.
11. Both sides affirm the importance of existing Philippines-China bilateral dialogue mechanisms in enhancing understanding, broadening cooperation and striving for a stronger relationship. Both sides agree to resume the Foreign Ministry Consultations, Consular Consultations, Joint Commission on Economic and Trade Cooperation, Annual Defense Security Talks, Joint Committee on Agriculture, Joint Committee on Science and Technology, and other bilateral dialogue mechanisms.
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12. Both sides will encourage exchange of visits of high-ranking governmental delegations and leaders at the local level, legislative organs, political parties, and civil organizations, and increase interactions and communications.
13. The Philippines welcomes China’s proposal to open a Consulate-General of the People’s Republic of China in Davao in due course. Proper arrangements for the diplomatic premises in both countries will be made in the spirit of the 1975 Joint Communique, on the basis of international practice and reciprocity, with priority for the most immediate concerns.
14. Realizing that coordinated action is necessary to combat transnational crimes, the two countries’ relevant agencies, subject to mutually agreed arrangements, will enhance cooperation and communication to combat transnational crimes, including telecommunications fraud, on-line fraud, cybercrimes, drug trafficking, trafficking in persons and wildlife trafficking.
15. Both sides oppose violent extremism and terrorism in all forms and will cooperate in the fields of information exchange, capacity building, among others, in order to jointly prevent and address the threat of violent extremism and terrorism.
16. China understands and supports Philippine Government’s efforts in fighting against illicit drugs. Realizing that the problem of illicit drugs poses severe threats to the health, safety and welfare of the peoples of both countries, both sides agree to enhance exchange of intelligence, know-how and technology sharing on fighting against drug crimes, preventive education and rehabilitation facilities.
17. To further strengthen the efforts to fight against illicit drugs, both sides agree to establish operation mechanism for joint investigation on special cases and intelligence collection purposes. The Philippines thanks China for its offer of assistance in personnel training and donation of drug detection, seizure, and testing equipment to aid in the fight against illicit drugs.
18. Both sides commit to enhance cooperation between their respective Coast Guards, to address maritime emergency incidents, as well as humanitarian and environmental concerns in the South China Sea, such as safety of lives and property at sea and the protection and preservation of the marine environment, in accordance with universally recognized principles of international law including the 1982 UNCLOS.
19. Both sides agree to continue discussions with a view to signing a bilateral agreement on Transfer of Sentenced Persons.
20. Both sides agree that bilateral defense and military cooperation are important components of bilateral relations. To enhance mutual trust, both sides agree to implement the Philippines-China MOU on Defense Cooperation, through exchanges and cooperation in areas of humanitarian assistance and disaster alleviation and peacekeeping operations.
21. Both sides agree that bilateral economic cooperation remains strong, but has room for growth. Both sides commit to enhance economic relations in the priority sectors of the two countries by leveraging their complementarity and continuously promoting trade, investment and economic cooperation, through the activities identified under the MOU on Strengthening Bilateral Trade, Investment and Economic Cooperation.
22. Both sides acknowledge the mutual economic and social benefits gained from the Five Year Development Program for Trade and Economic Cooperation (2011-2016), and announced their commitment to its renewal through the Memorandum of Understanding on the Formulation of the Development Program for Economic Cooperation.
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23. Both sides identify poverty alleviation as their shared aspiration, and agree to exchange best practices and cooperate in projects in this regard.
24. Both sides express willingness to jointly undertake practical cooperation including infrastructure investment, infrastructure project construction and industrial production capacity. Both sides agree that infrastructure cooperation which are jointly undertaken will be subject to proper procurement process, transparency and in compliance with relevant domestic laws and regulations and international practices.
25. Both sides will develop financial cooperation including in areas such as concessional loans, preferential buyer’s credit, bonds issuance, loans, investments, securities, and others as mutually agreed upon including special loans for development. Both sides will strengthen cooperation in the Asian Infrastructure Investment Bank (AIIB) and other multilateral and regional development banks.
26. Both sides express willingness to expand the local currency settlement of bilateral trade and investment, and to coordinate to actively promote the regional financial cooperation which includes the multilateralization of Chiang Mai Initiative (CMIM) and bilateral swap arrangements (BSA). China welcomes the interest of Bangko Sentral ng Pilipinas (BSP) in participating in the Chinese Interbank Bond Market.
27. Both sides commit to expand cooperation in agriculture, particularly in such areas as (i) agricultural technology and infrastructure; (ii) agricultural trade; (iii) irrigation; (iv) climate change adaption and mitigation, and (v) compliance with animal and plant sanitary standards.
28. Both sides agree to strengthen cooperation on animal and plant inspection and quarantine. The Philippines welcomes China’s announcement to restore permits of relevant Philippine enterprises that export bananas and pineapples to China, and continue to import vapor heat treated mangoes which were packed in facilities that comply with standards set by China.
29. Both sides will undertake joint efforts to promote cooperation in the fields of high quality hybrid rice seeds, agriculture infrastructure, agricultural machinery, further develop the role of the Sino-Phil Center for Agricultural Technology, and other mutually agreed upon areas. China commits support for the Philippines’ effort to improve its food production capacity, training of agricultural technical professionals, and agricultural and fisheries industry development and capacity building, subject to domestic laws.
30. China expresses readiness to support Philippine requests for assistance under the framework of the ASEAN Plus Three Emergency Rice Reserve (APTERR) in times of emergency.
31. China expresses readiness to provide assistance to the Philippines in building scientific research industrial system and in science and technology training. Both sides are willing to explore the possibility of jointly building technology transfer centers, joint laboratories, and science and technology resources sharing platforms.
32. Recognizing the growing two-way tourist arrivals in the past few years and noting momentum that will be driven by the “ASEAN-China Year of Tourism” in 2017, both sides agree to set the goal of intensifying tourism cooperation. Both sides will encourage their citizens to travel to each other’s country, explore the possible increase in capacity entitlements in air services, and encourage airlines to open new flights between Philippine cities, including Davao City and other cities in Visayas and Mindanao, and Chinese cities, which will contribute to the realization of this objective.
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33. Both sides encourage the universities of the two countries to promote meaningful exchanges in the field of research and innovation and to strengthen academic exchanges and the model of university-research-industry communications and cooperation. China expresses readiness to increase allocation of Chinese Government Scholarship for the Philippines in the areas of science, technology, engineering and mathematics.
34. Both sides agree to encourage mutual visits of media personnel, exchange of media products, cooperation in facilities, technologies and training between Chinese media and Philippine media including the People’s Broadcasting Corporation. The competent media authority of China is willing to enhance exchanges and cooperation with the Presidential Communication Office of the Philippines.
35. Both sides express interest in increasing twinning agreements between their cities and provinces, noting that these arrangements will encourage mutual understanding between their peoples and tap cooperation potentials at the local level.
36. Both sides agree to cooperate in emergency assistance and disaster relief.
37. Both sides reaffirm the importance of further implementing the “Executive Program of Cultural Agreement between the Philippines and China, 2015-2018” and encouraged their cultural institutions and groups to increase exchange of visits. Both sides will positively consider setting up their respective culture centers in each other’s country.
38. Both sides attach importance to people-to-people exchanges between the two countries, noting that 2017 marks 600 years of friendly contacts between the Sultanate of Sulu and China, and the Philippines and China expressed interest in holding relevant commemorative activities.
39. Both sides will explore other areas of bilateral cooperation including in information technology, health, customs cooperation, research and development, education, and other fields that will be mutually beneficial to both countries.
40. Both sides exchange views on issues regarding the South China Sea. Both sides affirm that contentious issues are not the sum total of the Philippines-China bilateral relationship. Both sides exchange views on the importance of handling the disputes in the South China Sea in an appropriate manner. Both sides also reaffirm the importance of maintaining and promoting peace and stability, freedom of navigation in and over-flight above the South China Sea, addressing their territorial and jurisdictional disputes by peaceful means, without resorting to the threat or use of force, through friendly consultations and negotiations by sovereign states directly concerned, in accordance with universally recognized principles of international law, including the Charter of the United Nations and the 1982 UNCLOS.
41. Both sides recall the 2002 Declaration on the Conduct of Parties in the South China Sea (DOC) and the Joint Statement of the Foreign Ministers of ASEAN Member States and China on the Full and Effective Implementation of the DOC adopted in Vientiane on 25 July 2016. Both sides commit to the full and effective implementation of DOC in its entirety, and work substantively toward the early conclusion of a Code of Conduct in the South China Sea (COC) based on consensus.
42. Both sides agree to continue discussions on confidence-building measures to increase mutual trust and confidence and to exercise self-restraint in the conduct of activities in the South China Sea that would complicate or escalate disputes and affect peace and stability. In this regard, in addition to and without prejudice to other mechanisms, a bilateral consultation mechanism can be useful, which will meet regularly on current and other issues of concern to either side on the South China Sea. Both sides also agree to explore other areas of cooperation.
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43. China expresses support for the Philippines’ chairmanship of ASEAN in 2017. Both sides express satisfaction with the growth of ASEAN-China Dialogue Relations over the past 25 years and affirmed their commitment to the principle of ASEAN centrality in the evolving regional architecture. China affirms support for ASEAN integration, ASEAN Community Building, as well as ASEAN’s efforts in realizing ASEAN 2025: Forging Ahead Together.
44. Both sides affirm their continued cooperation in UN, ASEAN Regional Forum, Asia-Pacific Economic Cooperation, Asia-Europe Meeting, World Trade Organization, UN Climate Change Conference and other regional and multilateral organizations.
45. Both sides reaffirm adherence to sovereign equality, non-intervention, and non-interference enshrined in the UN Charter and reiterate their common commitment for the protection and promotion of human rights through dialogue and cooperation in light of the core human rights instruments to which both countries are parties to.
46. Both sides support the enhancement of the UN’s role through necessary and reasonable reforms. Both sides held that pushing for the implementation of development issues, upholding the legitimate rights and interests of developing countries, enhancing the voice and representation of developing countries in international affairs should be the priorities in the reform of the UN, including the Security Council, and increasing the role of developing countries in UN decision-making.
47. President Rodrigo Roa Duterte expressed appreciation for the warm welcome extended by the Chinese side. President Rodrigo Roa Duterte invited President Xi Jinping to visit the Philippines at a convenient time. President Xi Jinping accepted the invitation with pleasure. President Rodrigo Roa Duterte also said that he looked forward to welcoming Chinese leaders to the ASEAN and Related Summits in 2017.
Disclosures The lead author of this report holds shares in Chinese companies mentioned in this report, namely Tencent Holdings (700.HK) and Alibaba (BABA).
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