'Clear risks' for stability in China's Pacific lending

China's financial largesse in the Pacific carries "clear risks" for stability if left unchecked, a Sydney think tank warned, while saying allegations of "debt-trap" diplomacy are so far overblown.

In a study released Monday, the influential Lowy Institute warned that fragile Pacific nations risked borrowing too much and leaving themselves exposed to demands from Beijing.

China has repeatedly been accused of offering lucrative but unserviceable loans to gain leverage or snap up strategically vital assets like ports, airports, or electricity providers.

While Lowy said allegations that China was engaged in "debt-trap" diplomacy in the Pacific were overblown, the trend was not positive and countries like Papua New Guinea and Vanuatu were dangerously exposed.

Between 2011 and 2018, China committed loans to the region worth US$6 billion -- around 21 percent of regional GDP.

A majority of that money, $4.1 billion, was earmarked for Papua New Guinea.

Only a fraction, less than $1 billion, has so far been dispersed but China is still the single largest creditor in Tonga, Samoa, and Vanuatu.

"The sheer scale of Chinese lending and the lack of strong institutional mechanisms to protect the debt sustainability of borrowing countries mean a continuation of business as usual would pose clear risks," the report said.

The South Pacific has become a forum for intense competition for influence between China, the United States, and Australia in recent years.

The island nations sit on a vital shipping crossroad, contain vast reserves of fish stocks, and provide a potential base for leading militaries to project power well beyond their borders.

Beijing has stepped up engagement in the region through a series of high profile visits and no-conditions lending via its Belt and Road Initiative.

The Solomon Islands and Kiribati recently announced they would switch diplomatic recognition from Taiwan to Beijing after a long courtship by the country's Communist leaders.

Six Pacific governments are currently debtors to Beijing -- the Cook Islands, Fiji, Papua New Guinea, Samoa, Tonga, and Vanuatu.

Lowy said many of China's loans carry a modest two percent annual interest rate.

But it warned that China would need to adopt formal lending rules if loans were to be made sustainable as natural disasters like earthquakes, cyclones and tsunamis can quickly upend countries' ability to pay back loans.

"Three small Pacific economies -- Tonga, Samoa, and Vanuatu -- also appear to be among those most heavily indebted to China anywhere in the world," it said.

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