Beijing wants to build ‘demonstration parks’ in China and the Philippines that would offer tax breaks and other incentives, while further integrating supply chains

Amid US threats of decoupling, China is looking to shore up supply chains and maintain gains made under former president Rodrigo Duterte, experts say

China’s move to establish “demonstration parks” for trade and innovation in the Philippines is part of an effort to shore up supply chains amid US decoupling threats and moves by President Ferdinand Marcos Jnr to restore ties with Washington, analysts say.

Beijing wants to jointly build the parks in both countries, Huang Xilian, the Chinese ambassador to Manila, told Communist Party tabloid Global Times last month. Analysts say parks like these typically offer tax breaks and other incentives to stimulate business.

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The parks will also further integrate the supply chains of the two countries, he said.

His comments were published not long after Marcos Jnr said the future of the Philippines was tied up with the US as a "partner", effectively walking back his predecessor Rodrigo Duterte's more pro-China orientation.

Amid US threats of decoupling, China is likely looking to maintain gains made under Duterte with its new proposal, experts said.

"(China) wants to make sure that what was gained from the Duterte administration can be sustained," said Herman Kraft, a political-science professor at University of the Philippines Diliman.

In light of decoupling, he said, "my suspicion is that they want to have bases covered".

The US has slapped tariffs on hundreds of billions of dollars worth of Chinese goods and banned the export of American technology, which has driven many Chinese firms to establish alternative production bases in Southeast Asia.

Though the Philippines lacks the vibrant manufacturing hubs of Malaysia or Vietnam, and foreign investors are concerned about the costs of electricity and ocean freight, it has distinct advantages.

Chinese manufacturers can still source tech components from the Philippines, while taking advantage of the archipelago's relatively cheap land and English-fluent labour force.

"The Philippines is well located for the supply chain, in a good position between East and West," said Jonathan Ravelas, managing director of the Metro Manila-based consultancy eManagement for Business and Marketing Services.

Nick Marro, lead Asia-Pacific trade analyst with The Economist Intelligence Unit, said the proposed demonstration parks "might be a step in the right direction" to form "industrial clusters".

The Philippines and Fujian province in southeastern China - the origin of many ethnic Chinese Filipinos - are already working to set up complementary industrial parks, according to Seetao.com, a Beijing city-run news website focused on overseas infrastructure projects.

Senior officials from China and the Philippines have agreed to push forward with cooperation under the Belt and Road Initiative, while the website said that both countries "have a lot of room for practical cooperation" in semiconductors, electronics and energy.

Major foreign-invested factories in the Philippines operate on the former US Air Force base at Clark Field and in a chain of industrial estates between Manila and a port in Batangas province to the south.

Demonstration parks could quicken business if China and the Philippines can agree to cut back on paperwork, said Christian de Guzman, a senior vice-president with Moody's Investors Service in Singapore.

But Chinese officials may prize the country more for its maritime shipping links with the West and continental Southeast Asia than for its onshore supplies, said Zhao Xijun, school of finance associate dean at Renmin University of China in Beijing.

"The supply chain isn't necessarily that manufacturing or the economy is so important," Zhao said. "The security of transport channels is more significant."

China is the Philippines' second largest trading partner after the US.

China's total trade value with the Philippines reached US$57.75 billion in the first eight months of the year, up by 11.2 per cent year on year, Chinese customs data showed.

Exports to the Philippines outpaced imports and reached US$41.86 billion in the same period, with the main shipments being fuels, iron, steel and electronic equipment.

Given its trade ties with both countries, the Philippines is unlikely to choose one or the other when considering supply chains, according to analysts.

Still, Marcos Jnr's recent comments to US President Joe Biden in New York last month that Manila and Washington were "partners" and "allies" may have ruffled feathers in Beijing.

"There might be a sense that the pronouncements made by the Marcos administration as far as relations with the US are concerned make the Chinese government feel that their political investments in the Philippines under Duterte might be unravelling," Kraft said.

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