(Photo credit should read MANMAN DEJETO/AFP/Getty Images)

Chinese President Xi Jinping sent a clear and loud message to Philippines President Rodrigo Duterte last week: drilling for oil in the South China Sea could lead to war between the two countries. Financial markets of the region, however, don’t seem to be taking either leader seriously.

China’s threat, which captured headlines around the world, came up in a dialogue between the two leaders in which President Duterte told President Xi that he wants to drill for oil in disputed waters. Here are a few quotes from Duterte’s speech at the National Convention of the Philippine Coast Guard Auxiliary in Davao City published in rt.com.

“I really said, ‘It’s ours. I’d like you to listen for a while.’ I said, ‘Mr. Xi Jinping, I would insist that that is ours and I will drill oil there,’” Duterte said.

The Chinese leader, in response, allegedly threatened Duterte with an all-out conflict if the latter greenlighted drilling.

“[Xi Jinping] replied to me, ‘We are friends. We do not want to quarrel with you… We want to maintain the present warm relationship. But if you force the issue, we’ll go to war,’” Duterte said. “What more could I say?” 

Simply put: Beijing won’t tolerate another Duterte flip-flop in the South China Sea. The two countries are friends as long as Philippines forgets about international rulings and recognizes that the South China Sea is China’s own sea.

Meanwhile, Beijing is getting ready to defend those waters by deploying airborne early warning systems; control aircraft systems to the disputed South China Sea islands; and by constructing naval bases.

The trouble is that America and its allies France, Japan, and Britain view the South China Sea is an international sea rather China’s own sea, and are prepared to send that message to Beijing, according to a recent Chinatopix.com report. “Japan and the United States are worried by China’s efforts to exercise unilateral control over the South China Sea, a concern shared by France, which controls several Pacific islands, including New Caledonia and French Polynesia.”

Financial markets in the region do not seem that concerned, at least for the time being, focusing on economic fundamentals rather than the geopolitics noise.

Asian Markets as of 5/19/17


1-day Performance

1-Month Performance

ishares MSCI China (FXI)



iShares MSCI Philippines (EPHE)



iShares MSCI Emerging Markets (EEM)



iShares MSCI Taiwan (EWT)



iShares MSCI Japan (EWJ)



Market Vectors Vietnam ETF (VNM)



Source: Finance.yahoo.com 5/19/2017




FILE - Vietnam People's Navy personnel carry their country's national flag.

 (Contains links to several earlier related stories)

FILE photo p rovided by Filipino fisherman Renato Etac —  A Chinese Coast Guard boat approaches Filipino fishermen near Scarborough Shoal in the South China Sea. Scarborough Shoal has always been part of the Philippines, by international law. China says it is happy to control fishing in the South China Sea. Credit: Renato Etac

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For about five years China has been loudly proclaiming “indisputable sovereignty over the South China Sea.” China has said, everything north of the “nine dash line” shown here, essentially, belongs to China.  On July 12, 2016, the Permanent Court of Arbitration in The Hague said this claim by China was not valid. But China chose to ignore international law.