Debt distress not China driven

Saturday March 02, 2019 Written by Published in Politics
Prime minister Henry Puna with Chinese President Xi Jinping. 19030118 Prime minister Henry Puna with Chinese President Xi Jinping. 19030118

Debt distress in the Pacific is not a result of lending by China, revealed a paper published by the Australian National University’s Development Policy Centre late last year.


According to researchers Rohan Fox and Matthew Dornan, who compiled the paper, which also mentions the Cook Islands, there is a rise in debt stress in the Pacific.

However they concluded it was not because of the lending from China.

In the paper titled China in the Pacific: is China engaged in Debt-trap Diplomacy?, they also argued that the “debt-trap diplomacy” argument in the region was without foundation.

“Recent media coverage has touted the rise of Chinese aid and lending as a threat to Pacific nations’ sovereignty and to the West’s influence in the Pacific,” the paper stated.

“China, so the narrative goes, is aggressively lending to smaller nations who do not have the capacity to pay back the loans.

“Some commentators have even described such lending as ‘debt-trap diplomacy’, implying that lending forms part of an intentional strategy by the Chinese state to pressure Pacific island governments.”

In the paper, the researchers looked at international debt data to explore whether Pacific island countries are in debt distress and whether this is a result of lending from China.

“One issue we consider is whether Pacific island countries are at greater risk of debt distress than in the past. Using IMF and Asian Development Bank (ADB) risk ratings, we do see a rise in debt distress over the last five years,” they said in the paper.

“We also see that over 40 per cent of Pacific island countries are now classified as being at high risk of debt distress. So debt certainly appears to be a problem in the region.”

However the Cook Islands is ranked on the low end of the debt distress rating by country with countries such as Tuvalu, Tonga and Samoa among high.

Although it is the largest bilateral lender, the paper argues Chinese lending comprises less than half of lending in any single country, with the exception of Tonga.        

It said in fact, half of those countries in the “high risk” category do not even recognise China (PRC), meaning they have no access to Chinese concessional finance (they instead have a relationship with Taiwan).

“China has also provided significant sums to countries where debt is not an issue (i.e. to countries classified as being at “low risk” of debt distress).”

According to the paper, China holds around only 12 per cent of the total debt owed by Pacific nations, or about $1.9 billion (US$1.3 billion) out of about $16.2 billion in debt.

“Aggregate figures for the region are driven by Papua New Guinea and Fiji, the economies of which dwarf the rest of the Pacific. Borrowing by these two countries alone makes up 88 per cent of the region’s total debt. “However, in both countries, domestic debt dominates government borrowing – something that is explained in part by the activities of domestic pension funds.”

The paper also states it is only in Tonga, Samoa and Vanuatu that Chinese lending comprises over one- third of total debt.

“That leaves Tonga as the only country where the “debt-trap diplomacy” narrative has some basis. Tonga is in a high level of debt distress, and Chinese lending dominates – the result of two large concessional loans provided by China Eximbank in 2008 and 2010.”

However the paper argued the loan from China to Tonga came about in exceptional circumstances, which included Nuku’alofa riots in 2006, and road re-development driven by political machinations.

“Our analysis of debt in the Pacific strongly suggests that the “debt-trap diplomacy” argument is without foundation. Debt is a problem in the region, and one that appears to be increasing in importance. But for most countries it is not debt to China that is of concern.”

Deputy prime minister Mark Brown said this report points out that with a bit more research and in-depth investigation, they can see that China is not quite engaging in the “cheque book diplomacy as characterised in general media”. 

“It also shows that the Cook Islands debt position is very low risk as assessed.”

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