China: Stumbling
in the Pacific
3 October 2009 | by Fergus Hanson
China’s incoherent South Pacific policies
China lacks a coherent strategy for its aid program in the Pacific – beyond checking and reversing diplomatic recognition of Taiwan - and tends to pursue short-term objectives. It offers large loans without due consideration of the recipients’ ability to repay them, the tied nature of its aid reduces flow-on benefits to local economies and the secrecy surrounding its program obstructs development outcomes and breeds suspicion.This approach is a legacy of its long-running diplomatic recognition battle with Taiwan, and China’s pursuit of short-term goals has likely led it to miscalculate by over-engaging with the dictatorship in Fiji.
China’s Aid Programme
China regards the details of its aid program as a state secret and publishes no annual reports. Figures for 2008 were instead obtained by the Lowy Institute from numerous officials across the region, on the condition of anonymity. This has allowed for the most accurate estimate to date of China’s aid giving in the region.
In 2008, China’s pledged grants to the Pacific amounted to US$53m with an additional $153m in pledged soft loans; a total of $206m for 2008.
Total Chinese pledged aid (including loans) was estimated at $33m in 2005, $78m in 2006 and $293m in 2007. Although comparisons between years can be misleading (as several pledges in 2007, for example, are only now being disbursed) they do suggest rising Chinese interest in the region in recent years.
Soft loans are generally given for specific projects worth more than 20m yuan, such as the $9.4m loan to the Cook islands in 2007, used to build facilities and cover expenses for the 2009 South Pacific Mini Games.
The terms of the soft loans appear to be 2% p.a. interest, a 20 year term, and interest-only payments for the first five years.
Despite rising Chinese interest in the Pacific, there is little evidence China has a comprehensive grand strategy guiding its approach beyond the tussle with Taiwan.
Warming Cross-strait Relations
Since that time there hasn’t been a single change in the diplomatic balance, with Taiwan retaining its 23 remaining diplomatic allies.
Even though several Central American states have positioned themselves to switch from recognising Taiwan to recognising China - El Salvador’s winning presidential candidate made it an election promise - none have followed through on switching allegience.
This suggests a deliberate strategy by China to halt defections from Taiwans camp, in order to keep the wider warming in China-Taiwan relations on track. However, so far China has failed to re-focus its aid program away from the short-term and opportunistic influence-peddling which was a hallmark of the old, confrontational relationship with Taiwan.
Debt Burdening
China tends to focus the bulk of its aid on infrastructure projects. While the Pacific is in critical need of good infrastructure there are several problems with China’s current approach. One is the sheer scale of the debt that Pacific states are taking on. As a proportion of often tiny GDP figures the soft loans provided by China are large enough to cause concern across the region.
The Cook Islands Chamber of Commerce called for the government to reconsider a $9.4m soft loan from China to fund Pacific Mini Games facilities. The Chamber’s President was quoted as saying: “We call on the Cook Island’s government to take a really big breath and step back from the brink of mortgaging our future in this way. It took over a decade to extricate ourselves from the Sheraton debacle at enormous costs and this new loan could be even more disastrous for the long-term well-being of the Cook Islands”
However, the Cook Islands (population 21,000) went ahead with the loan anyway and when the Cooks Deputy PM was asked by ABC radio whether the Cooks would be able to repay the loan he replied: “We hope New Zealand will be at our aid to assist with this”.
In Tonga, concern was also expressed over the difficulty of repaying their loans from China. Tonga’s GDP is estimated to be $259m in 2009 while the soft loan China pledged in 2007 was $57.8m or an alarming 22% of its total GDP - in one loan.
In Fiji, the ousted Prime Minister, Laisenia Qarase criticised the interim government’s excessive borrowing from China saying: “Borrowing is good as long as there is a balance but if they keep borrowing at this rate then control would be lost”.
Another former Prime Minister, Sitiveni Rabuka added: “The Kings Road… and the sports complex are only two examples of [Chinese projects] that we know to have not ended well… Will our President agree with our nation being betrothed to another nation just because they have been able to buy us?”
One official speculated that one difficulty China might still be coming to terms with was just how small the Pacific Island countries are, and that one major loan has the potential to seriously undermine the fiscal situation of many regional governments.
In China’s defence, it should be noted that it has, to date, never insisted on repayment of a soft loan where that was manifestly not possible.
There is even an emerging sense that some Pacific Governments are taking on these large loans with the expectation that China will invariably forgive them and so capacity to repay them need not be considered seriously.
The Conditions Attached to Chinese Aid
The tied nature of these loans reflects the commercial dimension of China’s aid program which is administered not by an aid agency but by the Chinese Ministry of Commerce. It also has ramifications on the effectiveness of China’s aid in promoting economic development.
Tied, or conditional aid, locks local contractors and labourers out of the work being done, reducing the projects flow-on benefits to the local economy. One 2008 BBC report from Tonga noted: “The real beneficiaries are actually the Chinese, because they have secured an agreement to provide all materials, labour, engineering and all necessary supplies for the construction. China will also receive the funds so no tangible financial exchange takes place.”
There are signs that the failure by China to be transparent with recipients of its aid is also leading to suspicion. In email correspondence one Pacific official wrote: “The evidence on the buildings is anecdotal but the comparative value of the buildings, Chinese construction v local, it appears that the projected cost for construction may be overstated against the real cost. The money is not received, just the building. There is no transparency in materials used or the associated cost of these materials. So too with the labour component.
The same official was also concerned about the currency the loans are denominated in, and how currency fluctuations might affect the loan, saying: “It is a complex and somewhat murky affair that does not afford the country a lot of contract over the end product…”
Miscalculating in Fiji
And if past coups in Fiji are an indicator of likely future outcomes, Bainimarama’s leadership is not a guaranteed long-term proposition. Despite this, China has ploughed ahead with an ambitious engagement strategy with the interim regime.
Before the December 2006 coup, China and Fiji were engaged in discussions on a $150m soft loan but it was only after the coup that the deal was concluded. China followed this loan up with a pledge in 2008 of $83.1m in the form of a soft loan to finance the Nadarivatu hydropower project.
It has also maintained an active visit diplomacy with Fiji including the ‘stop-over’ by Vice President Xi Jinping in February 2009 on his way to Mexico.
Initially, a plausible explanation for this active engagement was that if China failed to engage a regime starved of Western funds, it would invariably turn to Taiwan. But with the election of President Ma in March 2008 and the subsequent diplomatic truce that emerged, this no longer explained the extent of China’s engagement which has gone well beyond what normal relationship management would require.China’s engagement with the interim regime suggests a miscalculation on China’s behalf.
There is no doubt it has been successful in currying favour with the interim regime but it would seem a risky way to position itself in the longer term in Fiji.
The Path Ahead
The recent diplomatic truce with Taiwan offers the opportunity for China to refocus on longer-term development outcomes that will better serve China’s reputation and interests in the region, the question is whether it will seize it.
While the warming in China-Taiwan relations might reduce China’s incentive for engaging so actively in the Pacific, it is unlikely to result in China withdrawing from the region. The truce remains fragile and China also has secondary resource interests in a few of the larger Pacific states. New motivators are also emerging such as rising concern over the need to protect people of Chinese heritage caught up in anti-Chinese riots.
The deadly May 2009 riots across PNG, following prior incidents in Solomon Islands and Tonga, serve as a reminder of the deep anti-Chinese sentiment in the region and the need for Chinese officials on the ground to engage in more active preventative measures with their local counterparts. It is in China’s interests to re-focus its aid program on longer-term development outcomes and address some of the present shortcomings. Other donors also have the opportunity to work cooperatively with China.
Efforts to include China in the recently formed Pacific Region Infrastructure Facility (PRIF), for example, should be pursued.
The PRIF could be expanded to allow Chinese firms to win infrastructure contracts, provided they use Pacific workers and China could be offered the opportunity to take on projects scoped by PRIF members: an approach China has already shown itself amenable to, having taken on projects in Fiji, like the Nadarivatu hydro project, scoped by the World Bank.
Pacific states should look to develop a more structured and united approach to their engagement with China, by putting more pressure on China to allow local workers opportunities to work on Chinese infrastructure projects, by increasing the grant to loan ratio of Chinese aid and by insisting provision be made for recurring costs.