Australia must tread carefully in its Pacific contest with China

If you want a glimpse into the future of Australia's relationship with China, with all the elements of competition and co-operation, and tensions and bridge-building, then this week is a good place to start.

Marise Payne is in Beijing, the first visit by an Australian foreign minister to the Chinese capital for over two years, evidence enough of the depths to which the relationship had sunk. While she was there, Scott Morrison announced a swathe of fresh policies to reassert Australia’s place as the prime economic and security partner of Pacific island nations.

The initiatives include new aid, a development bank, military partnerships and new diplomatic posts, including one in Niue, population 1624. No one has any doubt as to why the Cabinet has suddenly become excited about what many politicians crassly call “our backyard”.

Earlier this week, Treasurer Josh Frydenberg announced he was knocking back the $13 billion bid by a Hong Kong-based company for Australia’s dominant gas pipeline company on “national interest” grounds. Although the Cheung Kong Group is widely considered a commercial entity not in thrall to Beijing, the blossoming horde of self-ordained Sinologists debating the issue in Canberra have ensured the controversy has been viewed through a Chinese lens.

If that wasn’t enough, Australia joined western nations at the United Nations this week in criticising the mass internment in Xinjiang of Uighurs, detained on anti-terror grounds.

Geopolitical competition, toughened scrutiny of any large investment with a whiff of China attached to it, squabbles over human rights. And, finally, a top-level dialogue to smooth out these differences.

Australia will have to get used to handling a cascade of difficult issues with China, all the while striving to preserve an immensely valuable trade relationship. Amid such upheaval, it is worth asking whether Canberra’s new policies are well targeted to address the new challenges.

In the Pacific, for example, there is a clear desire for new infrastructure and a strategic drive to do more to ensure that China doesn’t squeeze Australia out of the region. The ad-hoc approach Australia has taken to date - from rushing to replace China’s Huawei in building the Solomon Islands fibre-optics cable to beefing up the Black Rock Naval facility in Fiji and building a military base in Manus island in Papua New Guinea - is clearly not sustainable.

The government needs to proceed with caution for a number of reasons. First, we have limited political and policy bandwidth with the Pacific. While our interest in the region often spikes, as it has this year, it also can quickly drop off, running the risk we lose control of complex new funding instruments and projects.

Second, infrastructure financing, particularly through debt, is already a congested market in the Pacific. With China, the Asian Development Bank and World Bank already having written substantial loans, many Pacific countries have little capacity to borrow more funds.

According to data collected by the Lowy Institute, China hasn’t committed a new loan to any Pacific country except Papua New Guinea since 2016, not for lack of trying. As more countries face having to pay back debts to China, their appetite for more has soured, making it a questionable time for Australia to be offering loans.

Finally, Australia’s push to squeeze out China is by no means guaranteed. Chinese enterprises are firmly entrenched in the Pacific, and would be competitive in any infrastructure tender Australia put out. China can also operate more flexibly than Australia – we have to justify investments in our near region, and we also expect them to be paid back.

By contrast, China doesn’t need to operate on such strict terms. While the quality of their projects may vary, they are better equipped to say yes to the requests of Pacific leaders.

None of these concerns are unassailable, but if Australia’s new plans cannibalise our already diminished aid program, or fail to get sustained political and bureaucratic attention, then we’re better off staying clear.