Papua New Guinea signed up to China’s Belt and Road initiative in 2018 but this is unlikely to result in significant investment, according to Dinny McMahon, author of China’s Great Wall of Debt.  China’s foreign exchange challenges are to blame, he tells Business Advantage PNG.

Credit: Pexels

For years, China has been spending billions of dollars on President Xi’s ambitious Belt and Road initiative, a vast infrastructure spend aimed at helping and influencing neighbouring regions. But changes in the country’s foreign exchange position have led to a strategic reversal.

Dinny McMahon tells Business Advantage PNG that the change in China’s policy towards offshore investments dates back to 2016.

‘Most people still assume that the Belt and Road is about China handing out fistfuls of cash left right and centre,’ says McMahon. ‘It is just not the case any more.’

Shift

The shift, he says, can be seen in the behaviour of the China Development Bank (CDB), China’s policy bank.

‘It was the tip of the spear when it came to funding Belt and Road – even before it was called the Belt and Road initiative. President Xi Jinping announced the new policy in 2013 and the CDB was already shovelling huge amounts of funds out the door to fund infrastructure globally.’

‘This has had a huge knock on effect to Belt and Road. The policy banks aren’t funding it in the way they used to.’

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McMahon, who works at the Paulson Institute’s MacroPolo think-tank in the US, says the CDB’s funding of foreign currency loans, however, peaked in 2016 and has declined since.

‘That was when the government really started worrying about its foreign exchange reserves because, over the previous 12 months, from mid-2015 to mid-2016, its foreign exchange reserves declined by about US$1 trillion.

‘What they were left with is US$3.2 trillion, which seems a lot. But there are a lot of questions about how much of that is liquid [ready to use]. The whole point of foreign exchange reserves is that they have to be able to defend the value of the currency and ensure you have enough money to cover imports.

Knock-on effect

Dinny McMahon

The picture he outlines suggests that Papua New Guinea will struggle to get any significant Chinese investment.

‘This has had a huge knock on effect to Belt and Road. The policy banks aren’t funding it in the way they used to.’

This is leaving more of the heavy lifting to established multilateral lenders such as the Asian Infrastructure Investment Bank, Asian Development Bank and World Bank.

‘If you ask the question: “Why would they need the multilaterals to fund it?” – this is exactly why.’

State strategy

Xue Bing, Lino Tom, Minister for Fisheries and Marine Resources, attended the launching ceremony of the implementation of the Protocol on Inspection, Quarantine and Veterinary Sanitary Requirements for Wild Marine Fishing Aquatic Products, which allowed direct export of PNG fishing products to China. Credit: Chinese Embassy in PNG/Facebook

McMahon says that there is no single model being used by Chinese investors. Sometimes a hands-off approach is used, sometimes the investors are very involved.

He notes, however, that Chinese foreign investments are nearly always linked to their government’s political strategies.

‘When you have a big state firm going overseas and buying foreign infrastructure, it is not about diversification, it is not about profit, it will be something that is explicitly strategic,’ McMahon says.

‘These days, any overseas buying is done with state strategic interests in mind, even if it is a private company. They are not necessarily being told: “We want you to go overseas to invest in this or that technology.” It is just that, at this stage, the government’s priorities are so clear they know that to get deals approved it has to line up with Beijing’s interests.’