China: The Pacific's new banker

5 April 2011

By Fergus Hanson, Director of Polling and Research Fellow, Lowy Institute

The Lowy Institute today launched the fourth in a series of reports on China's secretive aid program in the Pacific. China still refuses to report the details of its aid program, so we went to Pacific governments who provided us with the figures. The reports now cover the five year period from 2005 to 2009 and, absent official Chinese figures, provide the most detailed picture available of China's aid program.

Over this five year period some trends and patterns have emerged.

First, China is now one of the Pacific's largest aid donors, a position it has gained in a very short timeframe. However, it is still a considerable way behind the region's largest donor, Australia.

Second, China has now become a major lender to the region and probably needs to start giving greater consideration to the sustainability of the loans it is making to Pacific countries. Over the five years covered by these reports, China has pledged more than $US600 million in concessional loans to the Pacific. In the case of Tonga, loans from China are worth the equivalent of one third of its GDP.

There is, of course, nothing inherently wrong with loaning money to Pacific countries, provided they go towards productive uses that will improve a country's capacity to repay them. But sometimes loans are used for less worthy projects. The Cook Islands took out a loan from China to build sporting facilities for the Mini Games only to have Standard and Poor's downgrade its credit rating, reportedly in part because of these loans.

Third, China appears to be somewhat responsive to requests to tweak its approach. China seems to be allowing Pacific workers to participate in building a few Chinese sponsored infrastructure projects and there were modest indications China is looking to improve the transparency of its aid (although a lot more needs to be done).

Fourth, diplomatic competition with Taiwan has been the primary driver of Chinese engagement in the region. With the election of President Ma in Taiwan and the ensuing (unofficial) diplomatic truce, the destabilising 'dollar diplomacy' that used to be the hallmark of both China and Taiwan's aid has eased. Concern about a return to diplomatic competition still looms large, but the truce has allowed China to pull back from its overblown support for the regime in Fiji and perhaps even begin to consider a broader approach in the Pacific. 

The full report, co-authored with Mary Fifita, is available from the Lowy Institute website.

Follow @FergusHanson and @MaryFifita

Photo by Flickr user Fab o lens.

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4/5/2011 11:14:28 PM #
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