The first round of bills are coming due for China’s Belt and Road Initiative (BRI) recipients in the South Pacific – and few can pay.
Squeezed by the costs of frequent natural disasters, crumbling infrastructure and low economic growth, the Pacific Islands are a natural fit for China’s US$1 trillion BRI global infrastructure-building ambitions.
Even small loans go a long way in countries like Tonga, Vanuatu and Papua New Guinea, but the ability to repay or negotiate refinancing is testing Pacific governments who must now make politically unpopular decisions to service the debts.
That pressure is clearly being felt in Nauru, one of the smallest of the Pacific region’s states. It butted heads with China this week as it hosted the Pacific Island Forum, an intergovernmental organization that aims to enhance regional cooperation.
The clash was ostensibly over a perceived as over-demanding China delegation, but the brouhaha also spoke to the frustration many states feel with China as it aggressively ramps up pressure on individual Pacific states to cut their diplomatic ties with Taiwan.
Nauru President Baron Waqa refused to allow China’s representative to address the forum ahead of the prime minister of Tuvalu. Both Tuvalu and Nauru have maintained ties with Taiwan despite Beijing’s pressures.
Waqa said China’s lead diplomat, Du Qiwen, had been “very insolent” and a “bully”, according to a Reuters report of the incident. After demanding an apology, Waqa said “from this meeting in Nauru, going forward, we will not allow this kind of behavior in our Pacific meeting space,” the report said.
These tensions seem set to escalate as the first round of repayments come due for relatively massive infrastructure loans Pacific nations have taken out with China.
This month, Tonga will begin a repayment schedule for a US$115 million loan from China to redevelop infrastructure in its capital Nuku’alofa and expand infrastructure in rural parts of the island.
For China, the US$115 million loan is barely a rounding error in its estimated US$1 trillion BRI budget. For Tonga, however, it’s almost one-third of its annual gross domestic product and will double the island’s national debt load.
Papua New Guinea (PNG) and Vanuatu are also expected to face debt stress as loans mature in the coming years. PNG owes China nearly US$2 billion arising from concessional loans, or nearly a quarter of its total debt. For Vanuatu the situation is more extreme, with loans owed Beijing representing around half of its external debt.
Gabrielle Chefitz and Sam Parker sounded the alarm in their paper “Debtbook Diplomacy” published by the Harvard University Kennedy School in May. The scholars noted the trend is not exclusive to the Pacific and Asia but has also taken hold in Africa, where similar conversations among leaders are developing.
“Time and time again, countries are pointing to Sri Lanka,” Chefitz says. Last year, Sri Lanka was unable to pay back around US$1 billion in debt after taking out a series of high interest loans under the BRI scheme. By December, China had a controlling equity stake and a 99-year lease on the crucial Hambantota port.
For Pacific Island nations which once embraced China’s easy credit, the incident has been a clear warning of the sovereignty-eroding risks of BRI-related projects and loans.
Australia has traditionally been the largest provider of aid in the region, a position China is fast supplanting. Domestic political priorities have resulted in deep cuts in Australia’s aid budgets, including slashed outlays to Pacific Island nations.
But China’s fast rise in the region has given the Pacific new strategic significance to Australia, particularly amid reports in April that Beijing approached Vanuatu about establishing a naval base on the island nation.
While Canberra has had strained relations with many Pacific nations, often due to perceived as political arrogance, Vanuatu and Australia have enjoyed strong bilateral relations for decades. This has included military and security training as well as the accounting for the majority of the small island nation’s foreign direct investment.
Both Vanuatu and China denied they had discussed building a possible naval base, but the reports underscored Australia’s and other Pacific Islands’ rising concerns about Beijing’s commercial and strategic ambitions in the region.
“On one hand countries are waking up to the challenges of what they can and cannot do,” Chefitz says. “But China is more sensitive to its image. After a significant slew of [critical] stories, they’re increasingly mindful of the investments they make and how flexible instruments of debt can be.”
She notes rising perceptions that China is using BRI investments and loans to aggressively snatch up ports and military bases around the Indo-Pacific is damaging its earlier carefully cultivated soft power image.
Some believe Australia could leverage that emerging perception shift to regain lost ground in the Pacific. Greg Colton, a Pacific Islands researcher, noted in a Lowy Institute report earlier this year that while announcements from now ex-prime minister Malcolm Turnbull’s government often referred to “stepping up” engagement with Pacific nations without much detail, policy evolution is actually developing.
Colton, for one, recommends utilizing multilateral relationships with other powers who have existing interests in the region, specifically Japan, the US, France, New Zealand and India, to develop strategies to increase engagement and strengthen ties with these countries traditionally treated as diplomatic afterthoughts.
That may already be happening: In late July, Australia along with the US and Japan announced a vague new plan to compete with BRI projects in the Pacific. While no details of the potential competing scheme have been publicly released, it is expected the partnership would offer similarly-sized loans as the BRI, but with much lower interest rates and without sovereignty-threatening strings attached.
Previous suspicions of Australia, the US and Japan in the Pacific region may have eased in light of the Sri Lanka example and rising concerns of BRI “debt traps.” And with great powers now competing for influence, Pacific states may soon have the luxury of choosing rather than begging for foreign aid and investment.
More anti China bullshit propaganda!
When you want to borrow money you pledge to repay with collaterals as guarantee, pretty normal like any commercial loan. If you can’t pay the banks seize your property. Is that a clear enough explaination.
Peter Seo: Do you know there were some loans without collaterals? From 1900 to 1940s China borrowed money from private citizens in the West. From American ciitzens alone, China borrowed hundreds of billions of $US according to americanbondholdersfoundation.com, without any collateral. Up to 2018, the loarns remain unrepaid and the creditors remain helpless.
What has gotten to Atimes? This is the second one of these China bashing articles without presenting evidence and openly using the propaganda slogan of the empire "debt-trap diplomacy" streight out of the Goebbels playbook. PATHETIC
Wood Wu, the link you provided is most likely a fabricated story; otherwise, like most of cases it was the creation of the American financial swindlers in the Wall St. like the debts they created in Argentina, Greece, and all other debts in other nations, majority of the money of the debts went into the pockets of the American swindlers and a small portionof the money went to the proxies rubber stamped the documents.
Anyhow, it is illegal to bind debt beyond the one borrows the money, such practice is serf bondage and slavery before 18th century, it is against the nature right of human beings, it was condemned illegitimate, barbaric, and as crime against humanity by the world since French Revolution, UN Charters and by all sovereign governments.
The article proved the Americans and anyone believes serf bondage and slavery are barbaric and morally bankrupted, therefore they are not deemed valid and legal in the international community and law.
Besides there were no modern infrastructure in China 1940, it proves those debts were frauds.
Wood Wu Because it wasn’t published by the CCP, he thinks it’s nonsense
Please keep on lending good money to these states, then ask for it back !
After all these loans from China, why are these countries still impoverished ? Didn’t the loans lead to good investment or development, so was China negligent in checking what the money was used for ?
Is Xi wearing platform shoes ?
Thats just what the Western Imperialists said in 1750…. next thing they had Empires.
The bonds which Wood Wu refers to was issued by the Republic of China which is in Taiwan and not by the Peoples’ Republic of China. By all means the bondholders should demand settlement from Taiwan.
Quote: " The American Bondholders Foundation represents more than 5,000 creditors holding Chinese
bonds issued by the Nationalist government of Chiang Kai-shek between 1912 and 1942. "
Many contracts have " force majeure " clauses that reduce the liability of the borrower.
I quote Erin:
“Time and time again, countries are pointing to Sri Lanka,” Chefitz says. Last year, Sri Lanka was unable to pay back around US$1 billion in debt after taking out a series of high interest loans under the BRI scheme."
Please note that: Chinese preferential loan quota to Sri Lanka was already used up so SL has to take loan from China’s ExImport Bank. And Hambantota is not part of BRI. Chefitz write BS.
SLanka wanted to develop Hambantota devastated by a tsunami. It has nothing to do with BRI.
QUOTE " "At first, the Sri Lankan team tried to seek loans from banks from other countries. However, those banks had no interest in providing loans to a country which was facing a civil war. Then, the Sri Lanka side turned to Chinese banks and companies," the expert said on condition of anonymity.
The Sri Lankan team did try to seek a preferential loan from China, he added, but the quota of China’s preferential loans then to Sri Lanka had been used for the Norochcholai Coal Power Plant and other projects.
"Given the importance to construct the Hambantota Port Phase I, the Sri Lankan delegation decided to ask for commercial loans. In fact, to get commercial loans as large as 300 million U.S. dollars during the war was not easy," the expert said, referring to financial risks in the then civil war-stricken island nation.
The China EXIM Bank had given two options to Sri Lanka, one was the fixed rate at 6.3 percent, the other was the floating rate with the London Interbank Offered Rate (LIBOR), which was above 5 percent then with the trend to rise higher.
"The delegation thought the fixed option was more beneficial for Sri Lanka and chose the fixed rates option. One should note that the interest rate of the Treasury bill was 12-14 percent in 2007. Considering all the factors, the fixed rate at 6.3 percent was the best choice then," the expert explained."
Go to : http://www.xinhuanet.com/english/2015-06/04/c_134297249.htm
So, what Chefitz wrote was completely BS and quoted by Erin out of context.
A similar story applies to Tonga.
The facts are:
Tonga’s Prime Minister Akilisi Pohiva recently confirmed his Government would start to repay the principal on two loans worth around $160 million from China’s Export Import Bank.
The loans from 2008 and 2010 were used, in part, to rebuild the central business district in the capital Nuku’alofa after riots in 2006.
China did grant a five-year extension to the loans’ grace period but so far has refused the request to convert them into a grant.
Tonga is still recovering from the impact of Tropical Cyclone Gita which struck the main island of Tongatapu in February and caused about $210 million worth of damage, equivalent to nearly a third of the country’s gross domestic product (GDP).
But there is also criticism of the previous Tongan government that took on the loans and its management of the funds.
"Money was left over, it got put towards renovating the Royal Palace in Tonga which definitely gives no return to Tonga as a whole," Dr Smith said.
"How well Chinese aid is used comes down to the state of governance in the recipient country, and if your recipient country isn’t able to handle the money sensibly or in a transparent way, then you get problems like this," he said.
So what Erin wrote is all out of context with malicious intent to castigate China.
Right, because in what passes for a "mind" in the Zhonghua, anything that dares to criticize "dee gretta on-da mah-tee mee-dow king-da-ma" must be propaganda.
You do realize the only government on the planet with a high-level government division openly set aside for propaganda (it’s even written right into it’s name) is China, right?
You do realize that division gets 5% of China’s GDP as their funding, right?
The Ministry of Propaganda is a Ministry-level organ, answering directly to the Politburo Standing Committee.
The Goebbels playbook, you say. So then, you are saying the ones using debt-trap diplomacy are China’s enemies.
Hm. Interesting. Care to cite an example?
I’ll get some popcorn before reading this, because I always love parallel universe sci-fi.
Robert A Harris I don’t view China as Imperial in intent, and not hegemonic. I don’t accept the Western view (I am quite Western thank you) that geopolitics is a zero sum game where the West looses and China wins or the other way around. Nothing is black and white, China is far from perfect but its NOT Imperial.
The age of empires id dying before our eyes, the US is the last of the Enlightenment great empires and there are no new ones on the way. When the US finally accepts the defeat it has already suffered for the first time in 500 years there will exist on earth no empire.