Payment due: The Pacific Islands in the red as debts to China rise

WELLINGTON / SYDNEY (Reuters) – A little over a decade ago, deadly riots in the capital of Tonga, Nuku 'alofa, destroyed much of central neighborhoods. business and government of the small Pacific country.

Out of the rubble, the government developed a plan to rebuild the city, including the construction of a new cruise ship dock and renovation of the Royal Palace – all funded by a new lender, China.

The initial amount of Chinese loans of about $ 65 million now exceeds $ 115 million, or nearly a third of Tonga's annual gross domestic product, and the government has taken out a second loan for road development throughout the country.

An expensive capital repayment schedule that begins in September and will double Tonga's debt financing bill left the government in trouble.

Tonga's precarious position is indicative of a debt-fueled hangover hitting the small economies of the Pacific, fueling fears that the region may face financial difficulties and become more sensitive to diplomatic pressure from Beijing.

In particular, the loans give Beijing leverage in one of the most contested regions in the world on the recognition of Taiwan, which has strong diplomatic ties with the region.

Reuters analysis of the financial records of 11 South Pacific island countries shows that China's lending programs have gone from almost zero to more than $ 1.3 billion currently in circulation in a decade .

The documents show that China is now the largest bilateral lender in the region, although Australia's significant aid programs mean it remains the largest donor in the South Pacific.

Chinese loans account for more than 60% of Tonga's total external debt and nearly half of Vanuatu's external debt. In dollars, Papua New Guinea has the largest debt to China, with nearly $ 590 million, or about a quarter of its total external debt. "Given the vulnerabilities of their economies, given the very few sources of income, they tend to be in many cases high risk of debt distress," Michel Kerf, director of the World Bank for the Pacific, told Reuters. telephone interview.

"Debt reaches the limit of what would be considered sustainable."

END OF GAME POLICY

Most experts believe that China's lending in the Pacific, dating back to 2006, relations with abroad as its economy and global influence increased. The funding packages also offered public companies the opportunity to participate in infrastructure projects.

Chinese companies built facilities throughout the Pacific from Vanuatu's Luganville Wharf – built by Shanghai Construction Group – to a water system in the Cook Islands Rarotonga, built by China Civil Engineering Construction Co.

. Chinese Foreign Ministry spokeswoman Hua Chunying said there was no evidence that China was responsible for creating an unsustainable debt.

"We have, according to the wishes of the countries concerned, provided financial support to the best of our abilities, which has provided assistance in times of need to promote the social and economic development of the countries concerned, and has received the financial assistance. affirmation and welcome Hua said at a press conference in Beijing in response to questions from Reuters.

She stated that China's relations with Tonga were "very good".

Yet experts say that the recent possession of the strategically important Sri Lankan port of Hambantota by Colombo as Colombo struggled with a spiraling debt crisis demonstrates the Asian giant's awareness that its loans are also a powerful strategic tool. [19659002] Last year, a Chinese state-owned company took over a 99-year lease from the port, as part of a plan to convert $ 6 billion in loans that Sri Lanka owes China equity.

The agreement raised concerns from the United States, India and Japan that Beijing could use the port as a naval base in the Indian Ocean, which the Sri Lankan government -Lankan and the Chinese Embassy in Colombo have denied.

Sam Parker, the co-author of Harvard's analysis of China's offshore financing and diplomacy, said that Hambantota was an "awakening" and identified the Pacific as equally vulnerable.

"We do not think there has been a huge Chinese conspiracy to lure countries into debt," Parker said in a phone interview. "But now that they've got it, we think they'd be ready to use it." They started to be a lot more aggressive in geoeconomics. "

Indeed, a recent US national defense strategy paper warned that China was using the "predatory economy" to achieve its strategic goals by forcing the neighbors to reorganize the Indo. -Peaceful region to the advantage of China, and New Zealand's defense policy statement, issued last month, highlighted the growing disruption in the Pacific of China's rise.

"The debt burden associated with the projects of Infrastructure has potential implications on influence, access and governance, "said New Zealand, blaming China.

The issue was raised recently by report to media reports, China wanted to establish a military base in Vanuatu after funding a wharf large enough to accommodate the warships. China and Vanuatu have both denied reports.

Despite Beijing's growing weight in the region, US Secretary of State Mike Pompeo said last week that he was confident that the South Pacific countries would choose the United States as allies of the China.

"I think that the South Pacific, like most countries in the world, includes the enormity of having an American ally – a country that for decades has systematically projected democratic values," Pompeo said. after meetings with Australian Foreign Minister Julie Bishop.

THE TAIWAN QUESTION

While loans are relatively modest on a global scale and the Pacific Islands have less strategic importance, the region has attractions for ascending power.

Washington and its allies warned Beijing against any attempt to establish military bases in an area that proved crucial in the Pacific battles of the Second World War.

Each Pacific state represents a vote in international forums such as the United Nations, and they control vast expanses of ocean-rich resources.

In addition, one-third of countries with formal diplomatic relations with Taiwan are in the South Pacific. China sees the island as a capricious province, to be taken back by force if necessary.

Taiwan and China have used loan and aid programs to help their supporters stay loyal after decades of several Pacific countries have changed allegiance.

In February, the Taiwan Foreign Ministry stated that China had forced Papua New Guinea to change the name of the Taipei Representative Office in the country and to remove the diplomatic registration plates. cars of diplomats.

"Recent moves suggest a return to increased cross-Strait competition in the Pacific Islands," said a report released in June by the US Economic and Security Control Commission.

TERMS AND CONDITIONS

Much of the criticism of Chinese loans in the Pacific focused on the projects for which the debts were used and the conditions attached to the loans.

The Cook Islands criticized some of its China-led projects after accepting subsidies for public buildings, including a courthouse and a police station, and a concessional loan for a stadium using equipment and imported labor.

"A lot of buildings are so unhealthy that they start to collapse," said Mark Short, former Cook Islands Justice Secretary.

Short stated that the stadium was rusty and dangerous less than a decade after its construction. A makeshift pen was built outside the courthouse because the cells below it lacked oxygen if they were occupied for more than two hours.

The Deputy Prime Minister of the Cook Islands, Mark Brown, acknowledged that the selection of materials and the quality of the workmanship in some parts of the buildings was problematic.

"To their credit, China has acknowledged the shortcomings … by committing to renovations on the three buildings," Brown said in an email. "Chinese help was available to meet the urgent infrastructure needs in the Cook Islands and we benefited from it."

The majority of China's financial support takes the form of concessional loans, while traditional regional players such as Australia, New Zealand and the United States tend to offer donations and leave loans multilateral institutions such as the World Bank and the Asian Development Bank.

Australia and New Zealand have recently diverted more funds to the region after years of seemingly indifference.

William Longwah, Sydney consul recently removed from Vanuatu, told Reuters that China was a financial easier to deal with than Australia.

"And Australia, when they do something that they take so long to process, so long to send the funds," said Longwah in a telephone interview.

Now, the pressure of debt is increasing on several Pacific Island governments.

China has shown no signs of deleveraging, denying Tonga's request to do so in 2013, although it has suspended capital repayments for five years.

Tonga plans to repay the principal of about $ 5.7 million of their Chinese loans in 2018-2019; almost doubling the country's annual foreign debt service bill and representing about 4% of its overall budget of $ 135 million.

Tonga's financial difficulties have already pushed the government to withdraw from the 2019 Pacific Games, an Olympic event held every four years, angering and prosecuting the council responsible for organizing games in the country. this mad nation of sport. .

Lopeti Senituli, political and media advisor to Prime Minister Akilisi Pōhiva told Reuters Tonga is still negotiating with Beijing to see if it can get its debts forgiven, but is preparing to begin payments.

"Of course, this would put all governments under financial pressure and we will do our best."

He acknowledged that the Pacific Islands have come under pressure from Beijing but denied being different from any other country having an economic relationship with China, which asserts "massive" pressure on a global scale.

"You can not just say that this only happens in the Pacific Islands, no, it happens to us all, regardless of the size of your economy, regardless of the political status of your structure. Government. "