MANILA/BEIJING - Philippine President Rodrigo Duterte and his Chinese counterpart Xi Jinping on Thursday (Aug 29) failed to see eye to eye on the 2016 arbitration ruling that invalidated Beijing's claim to nearly all of the South China Sea.

But the two leaders agreed to continue dialogue, work on a code of conduct by 2021 and operationalise a joint oil exploration deal, Philippine Ambassador to China Chito Santo Romana said.

"It wasn't a rebuff at all. Xi listened and didn't cut off (Duterte). The overall tone was diplomatic and friendly," the envoy told The Straits Times.

"Both sides stood their ground, stating their respective position. They agreed to disagree and move on," Mr Santo Romana said.

"Both sides agreed to continue dialogue. This is the start of what will be a long dialogue," he added.

Mr Duterte was "steadfast" in raising with Mr Xi "concerns central to the Philippines' claim in the (South China Sea), which include the ruling held by the Permanent Court of Arbitration in The Hague", his spokesman Salvador Panelo said in a text message.

The tribunal in 2016 denied China's claim to the strategic seaway, and said Beijing had violated the United Nations Convention on the Law of the Sea.

Mr Duterte insisted the ruling was "final, binding and not subject to appeal". But Mr Xi was unmoved, and reiterated China's decision to ignore it.

Mr Panelo said the two leaders "agreed that their variant positions will have to remain".

A report on Thursday's meeting by China's state news agency Xinhua made no mention of the ruling.

It said Mr Xi urged the two sides to "set aside disputes, eliminate external interference, and concentrate on conducting cooperation, making pragmatic efforts and seeking development".

"As long as the two sides handle the South China Sea issue properly, the atmosphere of bilateral ties will be sound, the foundation of the relationship will be stable, and regional peace and stability will have an important guarantee," it quoted Mr Xi as saying.

The row over the South China Sea - a major global shipping route thought to be rich in oil and gas reserves - has strained ties between China and the Philippines and other neighbouring countries with rival territorial claims.

Tensions have been building up since China began transforming a string of disputed reefs into missile-protected island bases.

Before he left for Beijing, Mr Duterte raised expectations even though it was unclear what he sought to achieve by pressing the arbitration victory mid-way into his six-year term.

He had largely avoided the subject, opting instead to curry favour with China.

Thanks to Mr Duterte's detente policy, China has become the Philippines' biggest trading partner and export market. Chinese tourist arrivals in the Philippines jumped nearly 20 per cent to 1.26 million last year.

But China's promise of billions worth of investments to fund Mr Duterte's US$180 billion (S$250 billion) infrastructure building programme has yet to materialise.

Mr Duterte did manage to extract a commitment from Mr Xi to move forward with plans for the Philippines and China to jointly explore for oil and gas in disputed waters.

Mr Xi assured Mr Duterte a "steering committee" was readying "a substantive programme on the matter", said Mr Panelo.

Xinhua quoted Mr Xi as saying China could take "a bigger step".

The Philippines is desperate for a new source of natural gas, as the Camago-Malampaya natural gas field, off the coast of Palawan province, which fuels three power plants that provide electricity to half of the main island of Luzon, dries up by 2024.

Reed Bank, a shallow seamount that spans nearly 9,000 sq km, is a promising prospect. It is believed to hold up to 5.4 billion barrels of oil and 55.1 trillion cubic feet of natural gas.

But these resources are in waters that China and the Philippines are contesting.

China has agreed to a 60-40 resource sharing arrangement, in favour of the Philippines. Mr Duterte is pressing to have this set in stone.