China and the World

A gamble on gas

Filipino leader focuses on profits rather than politics in China policy

Duterte-w

Uneasy neighbours

Three and a half years ago, when he was campaigning to become president of the Philippines, Rodrigo Duterte said he would confront the Chinese navy personally – on a jet ski, if needs be – in defending Filipino sovereignty.

Since taking office he has taken a less confrontational approach, despite a favourable ruling from an international court in The Hague on Manila’s right to an exclusive economic zone in disputed waters in the region (see WiC333).

Indeed Duterte came back from his fifth trip to Beijing this month with news that he has decided not to press the case further but forge ahead instead with joint oil and gas exploration with the Chinese in the contested seas.

As he explained to local media, he ran into a familiar roadblock when he raised the issue of respecting the court’s ruling with the Chinese president.

“We don’t want to discuss that because it’s ours,” Xi Jinping admonished. “We own the property. Why should we talk to you?”

Duterte added that the Chinese have asked him to disregard the Hague ruling and that he is willing to do so for economic reasons as the two nations would now search for oil and gas together, with returns split 60:40 in Manila’s favour.

A storm of complaint from his political opponents led to a clarification that he meant that he would set aside the disagreement rather than drop the claim itself. But his broader position is that it is pointless posturing about defending the seas because of China’s military superiority.

One risk to an oil and gas deal is that it muddies Manila’s legal claims in the South China Sea. Another is that it would make the Philippines more reliant on China for its energy. But Duterte is in a difficult spot. The best of the Philippines’ gas fields will run dry by the end of the decade and the world’s energy majors are reluctant to bid for new business because of the political risk in operating in close proximity to the ‘nine-dash line’, a marking on historical maps that China offers as evidence of its maritime jurisdiction.

Duterte’s preference is to focus on commercial outcomes and he is trying to do the same in another row with the Chinese – this time over gambling.

Here the dispute is over the POGOs, or Philippine offshore gambling operators, which allow punters to make bets in games hosted by dealers in virtual casinos. The Chinese government hates the online platforms and it has been pushing Duterte to close them down for months, saying that they are fuelling illegal gambling from China and acting as a conduit for capital flight and money laundering.

Here Duterte sounds less inclined to give ground. “Out of courtesy, I will listen to him. But I decide,” he said before his meeting with Xi in Beijing. His argument is that closing the gambling sites would be detrimental to the Filipino economy. They delivered $154 million in fees to the gambling regulator in the Philippines last year but they have offered a bigger economic boost for those parts of Manila where they have operations, following the hiring of more than 100,000 marketing and service staff from China. This seems to strengthen Beijing’s case that they are targeting gamblers in China, although the local licencing body has denied it, saying the sector is chasing Chinese players worldwide, because of their cultural love of gambling.

Manila is refusing to pull the plug on the existing operators but it has stopped taking applications for new ones. Maybe there is a deal to be done: Beijing might be willing to give ground on gaming if Duterte doesn’t rock the boat on the region’s seas.

However, other senior Filipino government ministers sound less sanguine. Speaking at an Asia Society event in New York this week, Foreign Secretary Teodoro Locsin likened a Beijing devised proposal for a code of conduct for the South China Sea to “a manual for living with a hegemon” or akin to “the care and feeding of a dragon in your living room”.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.