Papua New Guinea was the first Pacific country to sign up to China’s Belt and Road Initiative, an infrastructure development program across Eurasia. David James considers some of the implications identified by analysts.

Shanghai’s Lujiazui financial district, China. Credit: Chuyu

China’s massive infrastructure program, the Belt and Road Initiative (BRI), is planned to extend from PNG and New Zealand to Northern Europe.

More than sixty countries, accounting for two-thirds of the world’s population, have signed on to projects or have indicated an interest in doing so.

Darren Tay, Analyst–Asia Country Risk & Financial Markets at Fitch Solutions in Singapore, says the global scale of the Belt and Road Initiative (BRI) is so great that China was never going to be able to fund it alone.

‘China is facing a problem where its pockets are not so deep as was previously thought,’ says Tay.

‘The risk, they argue, is that the ‘country’s way of doing business’ may weaken PNG’s institutions.’

‘In the last quarter, China’s current account came in at a deficit for the first time (since 2010).

‘China is running out of financial resources to bankroll the BRI by itself.

‘That is why it is inviting in multi-lateral financial institutions.’

If China is moving to co-operate more with multilateral institutions, which have in the past been the source of much external funding for PNG, then it may mean that PNG will need to continue to look to multilateral banks, including the Asian Infrastructure Investment Bank.

Papua New Guinea signed up as a member of the AIIB last year.

Concessional loans

What is not clear is the nature of Chinese lending, especially the interest rate.

Stephen Howes, Director of the Development Policy Centre (Devpolicy), Crawford School of Public Policy at the Australian National University, and Matthew Dornan, Deputy Director of Devpolicy, note in the paper ‘Moving Beyond Grants’ that China is not a member of the Organisation for Economic Co-operation and Development (OECD).

Consequently, the country ‘is not required to report how much of its development financing is concessional (low interest rates), and how much is non-concessional.’

Howes and Dornan say that Chinese lending tends to have fewer strings attached: ‘China avoids asking for policy reforms. It just funds.’

‘One of the BRI’s objectives is to make China ‘a global access point for most of the world’s information’.

The risk, they argue, is that the ‘country’s way of doing business’ may weaken PNG’s institutions.

It is estimated that Chinese debt makes up 12 per cent of the total for the Pacific, compared with 21 per cent for the multilateral banks, including the Asian Development Bank and the World Bank.

In PNG, however, domestic debt dominates government borrowing, accounting for more than two-thirds of the total (due to the role played by the local superannuation funds, who buy up PNG’s government debt).

According to Devpolicy, PNG’s debt to China is less than 10 per cent, and its debt to multilateral banks is about a fifth.

Digital silk road

The BRI is not just about physical roads, ports and bridges, but is also about internet infrastructure, such as the Kumul domestic cable network currently bring built by Huawei for PNG Dataco.

Tay says that one of the BRI’s objectives is to make China ‘a global access point for most of the world’s information’.

‘Fibre deployments in BRI member states continue at a rapid pace, allowing the uptake of Chinese consumer technologies,’ says Tay.

‘China is also forging ahead with setting technological and technical standards.’

Tay notes that Huawei’s footprint in BRI countries is ‘largely progressing unchecked’.

However, Google’s blocking of Huawei from using Android apps on its devices may change that.

He suggests participants in the BRI are likely to be pressured to adopt stricter data laws, so ‘expect to spend more on data, or the cloud.’