Treasurer Charles Abel said the rise of China is creating opportunities for Papua New Guinea. But he also pointed to potential risks and a need to develop PNG’s relationship with Australia.

Treasurer Charles Abel Source: Lowy Institute

Speaking at the Lowy Institute recently, Abel observed that ‘one thing that is certain’ is the rise of China.

‘I think we can all appreciate what is happening in a global and a regional sense—the elevation of the Asia Pacific.

‘You have got to engage with China. China is coming and China is presenting many opportunities for countries like Papua New Guinea.

‘They are providing options for us in terms of funding and capital and expertise.

‘There remains some concerns in terms of the way they conduct business.’

‘They are competing in the same space that traditionally countries like Australia and the United States were in.’

Challenges

Abel said the rise of China presents challenges, implying a need to continue the relationships with established partners.

‘Some of the things that the Chinese interaction brings are not necessarily conducive to good governance, particularly if some of our country’s institutional frameworks are weak.

‘We very much need our traditional partners to continue their engagement in the region and in Papua New Guinea to make sure there is some balance brought there and to support us in this development process.

‘While we appreciate the interaction with China, there remains some concerns in terms of the way they conduct business.

‘There is a definite shift and movement going on within our region.’

‘I don’t think it is anything intentional, it is just that they are such a large animal and, in some of these engagements with smaller countries, there can be a tendency to overwhelm us and a tendency to inadvertently undermine some of our systems.’

Flux

Abel said there is a ‘definite shift and movement going on within our region’ creating a state of flux.

He pointed to the need for Australia ‘stepping up in the way it is conducting business’ with Papua New Guinea.

This includes ‘taking advantage of some of its competitive strengths in terms of the people-to-people relationship and the history.

‘Things like the Kokoda track. You can’t replace those things overnight. There is a real fundamental basis of a relationship with Australia that is special.’

‘We want to be the natural partner of choice.’

Abel added that the PNG leadership should be wary of undermining the building of institutions in the ‘headlong rush to easy capital.

‘There are very real risks that are emerging in that process.’

Concerns

There are signs of a concerted response from Australia to China’s growing influence in the Pacific. Australia is investing in an undersea telecommunications cable to the Solomon Islands and PNG, partly in order to prevent Chinese involvement.

Australian Foreign Minister Julie Bishop. Source: Australian Federal government

The Australian Foreign Minister, Julie Bishop has expressed concern about Chinese loans and debt-for-equity swaps.

She signalled that Australia will will compete with China’s infrastructure development spree. ‘We want to be the natural partner of choice,’ she reportedly said.

There is also American concern. A Harvard Kennedy School of Government report, Debt Book Diplomacy, by Sam Parker and Gabrielle Chefitz, says PNG’s debts to China are ‘opaque’ and growing rapidly.

‘Increasing Chinese influence and leverage in PNG alarms Australia more than it does the US,’ the report says.

‘But it remains to be seen whether Australia will make a concerted attempt to strengthen ties and keep PNG in its orbit.

‘To China, PNG is attractive as a regional leader in Oceania, for its LNG and other strategic resources, and potentially some day for its ports.’

The report says Chinese loans to state-owned enterprises (SOEs) do not appear in PNG’s public debt statistics.

It claims these SOE debts include a US$1.8 billion loan from China’s EXIM Bank.

‘Chinese loans are less concessional.’

‘The cost of servicing its debts to China have exploded from US$2 million to US$26 million in the past five years and will likely continue to rise.’

Interest rates

Such American concern about the use of lending for strategic interests could be seen as inconsistent. It is a tactic that has been used by American-controlled institutions in the Pacific for decades.

But there are financial risks. According to analyst Alvin Camba, from Johns Hopkins University, Chinese interest rates have usually been higher than comparable loans from other OECD Development Assistance Committee countries, mainly because China lends to states with low investment grades.

Analyst Graeme Smith comments that Chinese loans are less concessional than the Pacific’s other main sources of debt.

‘While well below market rates, the interest rate is higher and the maturity shorter than World Bank or Asian Development Bank loans.’

Foreign policy analyst Wenyuan Wu, commenting in the Lowy Institute’s The Interpreter, notes, however, that, although China is not acting out of ‘altruistic benevolence’ the “debt trap” argument oversimplifies Chinese commercial diplomacy.

‘Far from being helpless victims of exploitation, developing countries and their leaders have learned to use China to service domestic political agendas and mitigate policy pressure from Western counterparts.’

A comparison of countries’ exposure to Chinese influence. Source: Harvard Kennedy School of Government