Is China Going to Take Over a Major Philippines Shipyard?

Defense and security perspectives on the Hanjin bankruptcy debacle.

Is China Going to Take Over a Major Philippines Shipyard?

A Hanjin container ship passes through Astoria, Oregon.

Credit: Wikimedia Commons/ Nsandel

On January 8, 2019, the news surfaced that the Hanjin Heavy Industries and Construction Project, a Korean shipbuilding company operating in the Philippines, had filed for bankruptcy, citing “financial distress.” The announcement set off alarms since the bankruptcy exposes five Philippine banks to risk; Hanjin collectively owes them $412 million. However, the Bangko Sentral ng Pilipinas (BSP) downplayed this, arguing that the exposure is “negligible.” The five banks are reported to be working closely together “to cover their combined loan exposure… and working to take control of the Hanjin’s property in Zambales.”

While this is an economic predicament, especially given that this is the “biggest corporate bankruptcy to ever hit the Philippines,” concern over the future of the shipyard has taken center stage for the defense and security sector as well.

Initial reports indicated that Chinese investors are interested in the idea of taking over the business. Recently, Defense Secretary Delfin Lorenzana proposed instead that the government take over the operations of Hanjin to support the in-country production of vessels for the military and at the same time to prevent the business from closing down and putting more than 3,000 workers out of jobs. There have also been reports that suggest the Philippine Navy should manage the shipyard or at least portions of it. While some have expressed their support for this proposal, the capacity of the government to “engage in commercial activities” remains questionable. Whether Chinese investors or the Philippine government takes over what Hanjin has left behind, the defense and security aspect of the issue is prominent.

A Chinese Takeover

The possibility of Chinese investors saving the shipyard in Subic is financially favorable since they most likely could bring in the necessary cash flow to continue operations. Aside from the capital, China has technical and commercial expertise in shipbuilding. Notably, the Clarkson Research Services ranked China as the leading shipbuilding industry, followed by South Korea. A positive reaction from the economic sector on this possible Chinese takeover may not be surprising at all. However, suspicion over the intentions of China, as a state actor and as a nonstate actor under the guise of the private sector, and the strategic advantage such a takeover may hand to China calls for a second look on this proposal.

It is no secret that where Chinese economic interests are, Chinese military and security forces follow. With this premise, it follows that despite the lucrative economic gains in a Chinese takeover of Hanjin, or at least the prevention of a loss, security concerns are even more apparent. Taking over operations in the Hanjin shipyard would mean a takeover of the biggest investment in the Subic Bay Freeport Zone. If Chinese investors bring in a considerable amount of money to acquire the shipyard and continue the operations left by Hanjin, this would translate into a need for China to protect this economic interest.

Underpinned by the government’s Go Out policy, an increase in Chinese overseas investments has resulted in higher demand for security to protect these interests and activities. This is evident in China’s recent economic ventures in developing countries. For instance, the deployment of Chinese peacekeeping forces in Africa, particularly in South Sudan, has been linked with the need to secure the activities of the National Petroleum Corp. in South Sudan. In retrospect, the presence of the People’s Liberation Army Navy in Davao City in recent years could possibly be linked with the need to protect the growing Chinese investments in the city.

However, a direct intervention from Chinese military forces may not always prove beneficial to the image China is trying to build overseas. If the response to protecting Chinese investment overseas is plotted in a spectrum, the less proactive side involves the willingness of China to rely on local police forces of the host country while the more proactive end of the spectrum points to a direct intervention from Chinese military forces. In the middle is the use of the private security forces and diplomatic pressure to secure Chinese interests. Especially in fragile states or in more hostile environments, Chinese companies have preferred multinational or Chinese private security companies to provide the services they require for their security. Though more research is needed to establish the trend in Southeast Asia, Chinese investors with bigger stakes and in more hostile areas may opt to contract Chinese private security companies.

While private security services are an option to avoid raising suspicion from locals, the use government forces is still not out of the picture. Since the shipyard is located in one of the most strategic areas in the Philippines, the presence of Chinese military vessels in the area may be expected — ready to intervene if necessary. It would also give them access to this area, something that the U.S. Navy has enjoyed as a treaty ally of the Philippines. China may also use its economic leverage as diplomatic pressure, which is more likely given the neocolonial sensitivity attributed to Subic Bay with the presence of foreign militaries.

With China’s proactive involvement in the security of its overseas economic activities, interference in domestic laws, regulations, and even practices is also likely in order to ensure that the domestic security climate is favorable to Chinese associates. In Pakistan for instance, China exerted pressure on the Pakistani government to increase security for Chinese investments and workers following the killing of Chinese engineers instigated by separatist forces. As a result, the Pakistani government created a special security division, consisting of government forces and private security forces, tasked with protecting Chinese investments and workers. If China feel the same threat in its venture in the Subic shipyard, or in other investments in the Philippines for that matter, it may exert the same pressure on the Philippine government.

Reactions and Actions

It may be a logical policy from an economic and business standpoint to allow a capable investor to take over the shipyard left by Hanjin, but the prospect certainly raises concerns from the security and military sector. For those critical of China’s growing economic clout in the Philippines, it would be ironic to hand over this shipyard to a state or at least its associates that insists upon its claim over Scarborough Shoal and uses its maritime forces to exert de facto control in the West Philippine Sea. Further, the negative image already attributed to Chinese investment in the Philippines has sparked public uproar, and in some instances, has led to racism.

Yet, this may not be the issue that would raise the stakes for the future of Sino-Philippine relations. Though the Hanjin debacle is indeed a multifaceted issue that requires policy opinion and views from various sectors, it would not be surprising if the issue is eventually put on the back-burner. Considering that the dominant voice favors maintaining good relations with China — to the point where issues that may disrupt such progress are sidelined — the Hanjin issue is no different; it may gain traction among scholars and analysts but it will hardly be a cause for public debate that may threaten peace and public trust in the Philippine government. The upcoming midterm election, progress on the Bangsamoro Organic Law, and other local issues could eventually overshadow the discussions on a possible Chinese takeover. These variables must be considered if a sustained discussion on the Hanjin debacle is desired until decisions are made and the implications become evident.

Amicable relations with all nations is an important foreign policy objective. However, this must not come at too high a price.

Rej Cortez Torrecampo is the Senior Research Specialist of the Philippine Center of Excellence in Defense, Development and Security.