Pacific islands in the red as debts to China mount

Just over a decade ago, deadly riots in the capital of Tonga, Nuku’alofa, destroyed much of the small Pacific nation’s central business and government districts. Out of the rubble, the government hatched a plan to rebuild the city, including constructing a new cruise ship wharf and renovating the Royal Palace — all bankrolled by a new lender, China. The initial roughly $65 million in Chinese lending now exceeds $115 million — almost one-third of Tonga’s annual gross domestic product — as interest mounted and the government took out a second loan for road development across the country.
An onerous principal repayment schedule starts in September that will double Tonga’s debt financing bill has left the government scrambling.
Tonga’s precarious position is indicative of a wider debt-fueled hangover hitting small Pacific economies, stoking fears the region risks falling into financial distress and becoming more susceptible to diplomatic pressure from Beijing.
In particular, the loans give Beijing a lever in one of the most contested areas in the world over recognition of Taiwan, which has strong diplomatic ties to the region.
Reuters’ analysis of the financial books of 11 South Pacific island nations shows China’s lending programmes have gone from almost zero to over $1.3 billion currently outstanding in a decade.
The documents show China is now the region’s biggest bilateral lender, although Australia’s significant aid programmes mean it remains the largest financial backer in the South Pacific.
Chinese loans account for more than 60 per cent of Tonga’s total external debt burden, and almost half the external debt of Vanuatu. In dollar figures, Papua New Guinea has the biggest debt to China, at almost $590 million, representing about one-quarter of its total external debt.
“Given the vulnerabilities of their economies, given the very few sources of revenues they have, they tend to be in many cases at high risk of debt distress,” World Bank director for the Pacific, Michel Kerf, said. “Their debt is reaching the limit of what would be considered sustainable.”
Most experts believe China’s lending in the Pacific, which picked up from 2006, stemmed from Beijing’s broader push to increase overseas ties as its economy and global clout rose. Financing packages also provided opportunities for state-owned enterprises to take part in infrastructure projects.
Chinese firms have built facilities throughout the Pacific, from Vanuatu’s Luganville Wharf — built by Shanghai Construction Group — to a water network in the Cook Islands’ Rarotonga, which is being built by state-owned China Civil Engineering Construction Co.
Chinese Foreign Ministry spokeswoman Hua Chunying said there was no evidence China was responsible for creating unsustainable debt.
“We have, according to the relevant countries’ wishes, given financing support to the best of our ability, which has provided assistance in the hour of need in promoting relevant countries’ social and economic development, and received the affirmation and welcome of each country,” Hua said. — Reuters

Charlotte Greenfield & Jonathan Barrett