China in the Pacific: the new banker in town

This report reveals China has been increasing the loan-to-grant ratio of its aid and has now pledged over $US600 million to Pacific states. In Tonga, pledged loans from China equate to one third of its GDP.

China is now one of the Pacific’s major donors. An analysis of its aid program in the region from 2005 to 2009 suggests it is reducing the grant component of its aid and increasing the soft loan proportion. China has pledged over $US 600 million to the Pacific since 2005 and debt burdening will become increasingly pressing as Chinese loans accumulate and the five-year grace periods expire. There appears to have been limited progress improving transparency.

At this stage, China appears confident in its aid program and sensitive to analysis of it. In this atmosphere, the success of other countries’ efforts to encourage improvements in China’s approach is likely to be limited. Nonetheless, some modest efforts are worth pursuing over the long term. 

AusAID and other major donors should continue to try to engage China in joint projects. They should begin a discussion with China and Pacific governments on debt burdening.

Pacific governments should report aid flows from all sources, including China. They should continue to urge China to improve the use of local labourers, contractors and, where possible, materials in its aid projects, and push it to coordinate its aid activities consistent with the Cairns Compact.