Chinese loans pose ‘clear risks’ to stability of Pacific nations, Australian think tank warns
- In a new study, the influential Lowy Institute found that allegations China was engaging in ‘debt-trap’ diplomacy were overblown
- But it warned that Pacific nations risk borrowing too much and leaving themselves dangerously exposed to demands from Beijing
China has repeatedly been accused of offering lucrative but unserviceable loans to gain leverage or snap up strategically vital assets like ports, airports, or electricity providers.
While Lowy said allegations that China was engaged in “debt-trap” diplomacy in the Pacific were overblown, the trend was not positive and countries like Papua New Guinea and Vanuatu were dangerously exposed.
Between 2011 and 2018, China committed loans to the region worth US$6 billion – around 21 per cent of regional GDP.
Only a fraction, less than US$1 billion, has so far been dispersed but China is still the single largest creditor in Tonga, Samoa, and Vanuatu.
“The sheer scale of Chinese lending and the lack of strong institutional mechanisms to protect the debt sustainability of borrowing countries mean a continuation of business as usual would pose clear risks,” the report said.
The island nations sit on a vital shipping crossroad, contain vast reserves of fish stocks, and provide a potential base for leading militaries to project power well beyond their borders.
Six Pacific governments are currently debtors to Beijing – the Cook Islands, Fiji, Papua New Guinea, Samoa, Tonga, and Vanuatu.
Lowy said many of China’s loans carry a modest 2 per cent annual interest rate.
“Three small Pacific economies – Tonga, Samoa, and Vanuatu – also appear to be among those most heavily indebted to China anywhere in the world,” it said.