A sudden and unexpected bankruptcy has provided China with a unique opportunity to win control of a Philippine port facility at Subic, the former site of US military bases that were closed in 1991 amid a surge of anti-American nationalism at the end of the Cold War.

The local subsidiary of South Korean shipbuilding giant Hanjin Heavy Industries and Construction recently defaulted on more than US$400 million in loans from local banks, representing the largest ever corporate default in Philippine history.

Hanjin’s owners sought help from the Philippine government to find new investors to prevent the firing of some 3,000 workers. The company owes an additional $900 million to South Korean banks, according to reports.

Two unnamed Chinese companies, Philippine government sources say, have expressed interest in taking over the 300-hectare shipyard, reportedly the world’s fifth largest. Analysts note that China Ocean Shipping Company (COSCO) and China Merchants Group have recently aggressively bid to operate foreign ports in recent years.

Situated about 50 miles north of Manila, the port opens onto the strategic and contested South China Sea. It also lies just over 100 nautical miles from the contested Scarborough Shoal, currently occupied by China and seen as a crucial link if Beijing moves to impose an Air Defense Identification Zone (ADIZ) in the maritime area.

Chinese companies have also pursued investments in the nearby Clark special economic zone (SEZ), formerly the site of one of America’s largest overseas air bases but more recently converted to a commercial logistics hub. Chinese companies already operate similar facilities in Darwin, Australia and Piraeus, Greece for ostensibly trade-promoting commercial purposes.

Under China’s Belt and Road Initiative (BRI), launched in 2013, Chinese companies have played a key role in the construction and operation of 42 ports across 34 countries. Last November, during Chinese President Xi Jinping’s visit to Manila, Philippine President Rodrigo Duterte signed a series of agreements to enhance his government’s participation in the BRI.

There are already sovereign concerns that the Subic deal could eventually lead to a Sri Lanka-style take over, where a Chinese company secured a 99-year-lease over the Hambantota port after the local government there defaulted on Chinese loans to develop the facility.

Subic Bay was the site of America’s largest overseas naval base during the Cold War and it continues to serve as a repair and refueling station for its warships under Philippine-US defense agreements.

The two allies, under the Enhanced Defense Cooperation Agreement (EDCA), had in the early 2010’s considered to expand America’s rotational access to Subic’s military facilities.

However, Duterte, who rose to power in mid-2016, has moved to downgrade naval cooperation with the US in favor of enhanced ties with China. His administration has cancelled plans for joint patrols with the US in the South China Sea, and temporarily cancelled joint war games in the area.

Chinese President Xi Jinping and Philippine President Rodrigo Duterte. Photo: AFP/Mark Cristino
Chinese President Xi Jinping and Philippine President Rodrigo Duterte. Photo: AFP/Mark Cristino

Duterte’s government has also refused port access for resupplying and repairing US warships en route to conducting freedom of navigation operations in the South China Sea that China considers to be acts of aggression.

Under Duterte, Beijing has offered advanced weapons to the Philippine military, underscored by a US$500 million defense procurement loan in 2017, while Chinese warships have made unprecedented visits to Philippine ports, including a high profile stopover at Duterte’s hometown of Davao.

The two sides conducted their first-ever joint naval exercises last October near Zhanjiang in China’s southern Guangdong province and there are currently negotiating a defense agreement that could pave the way for more regular joint exercises and rotational Chinese access to Philippine bases.

Chinese companies have also set their sights on purchasing or building tourist establishments close to strategically-located bases and ports, including at the Bautista Airbase in Palawan, which is close to the disputed Spratly chain of islands in the South China Sea.

The US had considered prepositioning equipment, moving weaponry and developing the overall infrastructure at the Bautista Airbase under the EDCA. That would have allowed Washington to more effectively monitor and respond to contingencies in the South China Sea while providing the Philippines a latent deterrence against further Chinese encroachments.

Philippine President Rodrigo Duterte (C) standing beside missile tubes on deck while touring the guided missile frigate Changchun berthed at the Davao international port on May 1, 2017. Photo: AFP/Simeon Celi
Rodrigo Duterte (C) stands beside missile tubes on China’s guided missile frigate Changchun at the Davao international port, May 1, 2017. Photo: AFP/Simeon Celi

Duterte, however, has disallowed the placement of any weaponries by the US in the strategically located base, arguing that that such placements would violate Philippine sovereignty and unnecessarily provoke China.

Over the last month, Manila has also moved to review its 1951 Mutual Defense Treaty with the US, questioning its utility and mutual benefit. Philippine Defense Secretary Delfin Lorenzana even suggested that abrogating the treaty is an option on the table.

Against that strategic backdrop, some believe China is intent to leverage the Hanjin bankruptcy as a pretext to take over Subic to better monitor American warships and perhaps over the long run even deny them access to a port they have regularly visited for the past century.

According to Ceferino Rodolfo, managing head of the Philippine Board of Investments (BOI), two Chinese companies, one a state-owned enterprise, have expressed interest in saving the financially distressed shipyard.

It could come at a bargain price. Compared to a year ago, the financially troubled Hanjin Philippines has reduced its asking price to one-sixth of the facility’s previous value. No figure on the amount Hanjin now seeks has been made publicly available.

“They [Hanjin] asked for help in looking for an investor,” the Filipino BOI chief told reporters at a special January 11 press conference, though he refused to disclose further details about the prospective Chinese buyers and terms of their bid. “There’s an opportunity now with what happened to Hanjin. So we are linking the investors with them.”

US and Philippine troops at a joint exercise event in a file photo. Photo: Reuters
US and Philippine troops at a joint exercise event in a file photo. Photo: Reuters

Prominent legislators are up in arms over the potential deal’s sovereign and security implications.

Senator Grace Poe, a former presidential candidate who is currently leading the polls in her re-election bid, has asked the upper house’s committees on national defense and public services to conduct an inquiry into the potential takeover on the grounds the facility is a “critical and strategic national asset.”

“There is a need to determine the adequacy of statutory, regulatory and other legal frameworks for the ownership, control and management by foreign corporations and entities of strategic industries that are vital for national security, development, and economy such as shipyard facilities,” the senator said in her resolution calling for the inquiry.

Poe said that the “security and control over Subic Bay are paramount to the security of the [South China Sea], the sovereign rights and jurisdiction of Philippines over it is acknowledged and confirmed in the 2016 Award on the South China Sea Arbitration.”

The Philippines won its case against China’s wide-reaching claims over territories in the South China Sea Manila claims as part of its exclusive economic zone in a Permanent Court of Arbitration at The Hague ruling in July 2016. China has refused to abide by the ruling.

Months earlier, Poe oversaw a committee hearing on the entry of Chinese companies into the Philippines’ telecommunications sector, as well as a recent reported influx of illegal Chinese workers and online gambling businesses.

The Senate has already blocked funding for the Department of the Interior and Local Government’s (DILG) “Safe Philippines” project, which was signed during Chinese President Xi Jinping’s November visit to Manila.

The $400 million project involves the DILG’s installation of 12,000 surveillance cameras in major cities, including Metro Manila and Davao, with technology and technical advice provided by the state-owned China International Telecommunication Construction Corporation (CITCC).

Senate President pro tempore Ralph Recto openly opposed the project on the grounds that it poses “potential risks to national security or public interest”, given how “Chinese companies and individuals have also been allegedly involved in espionage and hacking activities over the recent years.”

Amid the legislative clamor, defense chief Lorenzana has suggested that the government take over the indebted port facility. The defense chief, known for his staunch independence and often suspect views on China, has said that Duterte is “receptive” to the idea.

“The Philippine Navy suggested that, why not the Philippines take over so that we’ll have a naval base there? Then we’ll have shipbuilding capabilities,” Lorenzana said during an event at the Foreign Correspondents Association of the Philippines in mid-January.

Whether the Philippine government could muster the necessary funds for a takeover is questionable. But what’s clear is that any move by China to win control of the Subic port facility will be met with nationalistic opposition, regardless of the deal’s economic and financial merits.