Experts Reject Chinese Diplomacy Claims of Pacific Debt Trap, But Risks Remain | Asia Pacific
China has not engaged in deliberate “debt trap diplomacy” in the Pacific, but the growing scale of Chinese lending and the institutional weakness of Pacific states present obvious risks for small states to be. overwhelmed by debt, according to a new report.
And an infrastructure arms race between China and other countries with interests in the region – including Australia – could only exacerbate the problem.
The Lowy Institute’s report, Ocean of Debt ?, says Chinese Belt and Road Initiative exposed the problem of unsustainable debt risk for less developed countries, especially for small, fragile economies in the Pacific. But report authors Roland Rajah, Alexandre Dayant and Jonathan Pryke argue that China’s global infrastructure plan presents a “more nuanced picture” than the accusation of “debt trap diplomacy” and sovereign risk. for small countries unable to repay their debts.
“The evidence suggests that China has not engaged in problematic debt practices in the Pacific to justify accusations of debt trap diplomacy, at least not to this day. Nonetheless, the scale of Chinese lending and the absence of strong institutional mechanisms to protect the debt sustainability of borrowing countries means that continuing with the status quo would pose obvious risks.
“China will need to significantly restructure its approach if it is to remain a major player in the Pacific without responding to the debt trap accusations of its critics.”
“Debt trap diplomacy”, in the broad sense, is when a creditor country intentionally lends excessive credit to a smaller debtor country, with the intention of obtaining economic or political concessions when the smaller country cannot repay the loan.
Due to their small populations, fragile economies prone to external shocks (such as rising oil prices) or uncontrollable events such as natural disasters and weak government institutions, Pacific states are extremely vulnerable to debts becoming unsustainable. Economic growth in the Pacific states is “more volatile than it is fast,” and this can unpredictably make repaying large loans unsustainable, according to the Lowy report.
China’s Massively Increased Aid and Development Presence in the Pacific is highlighted by its style contrasting with traditional aid donors in the region, such as Australia.
China has supported the development of infrastructure – usually large, iconic constructions such as bridges or important public buildings – and usually through loans rather than grants.
“Chinese assistance is perceived to be faster, better suited to the needs of local political elites and with fewer strings attached,” the Lowy report said. “As one senior official from the Pacific put it, ‘we love China because it brings the red flags, not the red tape.’
China’s development presence became evident when the Australian Prime Minister Scott Morrison visited Fiji last week. In order to meet Fijian Prime Minister Frank Bainimarama, Morrison’s procession had to cross the Fiji-China Friendship Bridge and pass the construction site of a 30-story tower funded by China, which will soon be the tallest building in the Pacific. he is.
But the nature and quality of Chinese infrastructure projects have been criticized.
The former Minister of International Development, Senator Concetta Fierravanti-Wells accused Beijing of “duchess” the Pacific, of building “white elephant” infrastructure, “roads to nowhere” and “useless buildings”.
“Tied funding, poor due diligence, oversized projects, weak project oversight, and fraudulent and corrupt practices are among the many criticisms that have been leveled at Chinese projects,” the Lowy report said.
But a 2014 study analyzing the impact and quality of Chinese projects in the Pacific found that some performed much better than others.
“Evidence suggests that, if left alone, Chinese state-owned enterprises will reduce costs and inflate prices. If managed properly, they can provide good quality infrastructure, ”the Lowy report says.
The case of the Port of Hambantota in Sri Lanka is cited as an example of “debt trap” diplomacy.
After funding from the China Export and Import Bank and the construction of a new inland port at Hambantota – the home neighborhood of former President Mahinda Rajapaksa, who gave the port the green light and who gave its name – the Sri Lankan government found itself in a situation of troubled debt and a debt-for-equity swap was offered, giving a Chinese state-owned company a controlling stake in the strategically located port from from 2017.
Likewise, Tonga, a country of 100,000 people, still owes China’s Exim $ 108 million – about 25% of Tonga’s GDP – for loans taken in 2008 and 2010 and twice postponed.
In 2018, the then Australian Foreign Minister, Julie Bishop, said Australia wanted to ensure Pacific states were not “trapped in unsustainable debt” by Chinese loans. “The trap can then be a debt-for-equity swap and they’ve lost their sovereignty.”
And in August this year, US Defense Secretary Mark Esper accused China of destabilizing the region through “predatory economies and debt-for-sovereignty deals.”
China has fiercely rejected the accusations.
“Rather than pointing fingers at China’s good deeds, those who continue to make baseless accusations and speculations could also do more themselves to help Pacific island countries,” Beijing’s ambassador wrote to Samoa, Chao Xiaoliang, in Samoa Observer.
“Some people have questioned the purpose of China’s aid, even ignored the facts, and fabricated the so-called ‘Chinese debt trap’ – either out of prejudice or ignorance of politics foreign aid from China. “
Lowy’s article argues that in order to prevent its infrastructure projects in the Pacific from becoming debt traps for small nations, China should reform its lending practices to approximate that of the World Bank and of the Asian Development Bank, “the flagship of international good practices”.
“If China is to remain a major development financier in the Pacific without responding to the debt trap accusations of its critics, it will need to significantly restructure its approach, including adopting formal lending rules similar to those of multilateral development banks. . “
Despite a significantly reduced aid budget – currently at an all-time low of 0.21% of GNI – Australia remains the main aid provider to the region. But, as part of the Pacific Step-Up announced in November 2018, Australia is looking to further engage in lending, alongside aid grants, with Australia’s Pacific Infrastructure Finance Facility ( AIFFP) of $ 2 billion – $ 1.5 billion in loans, $ 0.5 billion in grants – as well as another billion dollars in callable capital for Export Finance Australia (EFA).
The Lowy newspaper warns of an infrastructure arms race with China in the Pacific, arguing it could worsen the risk of debt traps for island nations.
“There are concerns that by seeking to compete directly with loans from China, Australia will only exacerbate existing debt sustainability issues in the Pacific.”