Commentary | 04 March 2015

The Geopolitics of Chinese Aid

The Geopolitics of Chinese aid: Mapping Beijing’s Funding in the Pacific

Dr Philippa Brant

Foreign Affairs

4 March 2015

Please click here for the online text.

  • Philippa Brant

The Geopolitics of Chinese aid: Mapping Beijing’s Funding in the Pacific

Dr Philippa Brant

Foreign Affairs

4 March 2015

Please click here for the online text.

  • Philippa Brant

Executive Summary

Throughout the small islands of the Pacific, China has been expanding its foreign aid program. In the last decade, nations from Samoa to Vanuatu have received hundreds of millions in funding. Chinese aid helps these countries build much-needed infrastructure, from the National Medical Centre in Samoa, to water pipes in the Cook Islands, to university dormitories in Goroka, Papua New Guinea. China stepped up its engagement in 2006 when it held the first China–Pacific Island Countries Economic Development and Cooperation Forum, pledging increased funding to the eight countries with which it has diplomatic relations. But recipients of China’s largesse are beginning to worry about their growing indebtedness to Beijing, and traditional donors are concerned that their influence in the region is diminishing in the face of a new, generous competitor.

The problem is, however, that no one has ever been clear about how much aid China gives to the region and in what form—neither Pacific Island countries, traditional donors, nor the Chinese government can say for sure. Data collection and sharing of information among Chinese agencies are still limited. Because most aid is tied to Chinese contractors, Pacific Island governments do not always know the cost of grant-funded projects. This sometimes leads to overstatement of China’s aid by Pacific leaders seeking to trumpet the nation’s support or by commentators who mistake every Chinese activity as aid and raise suspicions about Beijing’s longer-term intentions.

There are many reasons why few accurate records of Chinese foreign aid exist: most critically, China provides little data about its aid program, and most Pacific Island governments do not publicly report the full amount of aid they receive. Further complicating statistics are the Chinese government’s public pledges of aid that, as is true with other nations, do not always turn into real projects.

It is for these reasons that the Lowy Institute undertook a project to account for China’s aid program in the Pacific. Mapping Chinese Aid in the Pacific draws on over 500 sources, including budgets, tender documents, and government statements, as well as interviews and site visits. The result is an interactive look at Chinese-funded aid activities in the region from 2006 onward, marking the first time that data on executed Chinese projects have been systematically collected, verified, analyzed, and mapped.

As a result of this effort, it is possible to draw three important conclusions about Chinese aid in the Pacific. First, at the regional level, the research confirmed that China is now a significant donor equal to other traditional players such as New Zealand and is on track to overtake Japan as the third-largest aid donor in the Pacific. The research also shows how much Australian aid still dominates the region, despite a surge in Chinese funding. From 2006 to 2013, Australia provided six times more bilateral aid to the region than China, totaling $6.8 billion compared with $1.06 billion. Australia is, and will remain, the most significant external actor in and for the region. If China’s aid continues to grow, particularly if it establishes relations with some of Taiwan’s six current Pacific Island partners, it may overtake the United States as the second-largest donor in the region within a few years.

A second conclusion is that it is important to assess Chinese aid on both country and regional funding levels. In particular countries, the amount of Chinese aid now rivals the sums distributed by traditional partners. China is now the largest bilateral donor in Fiji and the second largest in the Cook Islands, Papua New Guinea, Samoa, and Tonga. China’s growing relationship with Fiji, for example, has caused particular consternation. Unlike other partners, China retained strong ties with the Fijian government after the 2006 coup. Between 2006 and 2013, China provided $333 million in bilateral aid, even more than Australia ($252 million) and almost three times that of Japan ($117 million). In Samoa and Tonga, the sum of Chinese aid is second only to Australia.

The size of China’s aid program at both regional and individual country levels begs the question of whether traditional partners will continue to set the regional development agenda—at least to the extent to which they are accustomed. Increasing amounts of Chinese aid can potentially give more bargaining power to Pacific Island governments when negotiating for development assistance—either by playing partners off one another or by turning to China to fund projects that other nations may not.

The third and perhaps most worrying conclusion is that concessional loans have become a dominant feature of Chinese aid to the Pacific. Prior to 2006, China had not provided concessional loans to the region, opting instead for grants and interest-free loans that were eventually forgiven and funded smaller showcase programs to compete with Taiwan for regional recognition. These are much better suited for countries with GDPs in the millions instead of billions, as large loans can constitute a significant proportion of national budgets in the region. Since 2006, however, almost 80 percent of Chinese aid to the region has been in the form of concessional loans. With negotiations under way for many new loan-funded projects, such as the Kokopo town sewage project in Papua New Guinea and road construction in Tanna, Vanuatu, this will remain a key feature of Chinese aid to the region in the years ahead.

Many Pacific governments have mistakenly assumed concessional loans would be eventually forgiven, as not all countries in the region have the capacity to pay them back. Larger economies such as Fiji and Papua New Guinea can likely manage repayment, although there are still concerns about the overinflated costs of loan-funded projects in these more developed nations as well. 

In smaller economies such as Samoa, Tonga, and Vanuatu, however, large Chinese loans can place significant burdens on struggling budgets. Tonga’s external debt, for example, sits at 44 percent of GDP. Concessional loans from China account for 65 percent of the nation’s debt stock, and it will be difficult for Tonga to service these debt obligations. Despite high-level overtures to Beijing, former Tongan Prime Minister Lord Tu'ivakano was unsuccessful in having these loans converted to grants. Repayment of one loan set to begin in 2013–14 would have accounted for over 17 percent of government revenue. China recently agreed to defer repayments for five years, but the original 20-year loan term does not change, meaning that annual repayments will be larger when they begin in 2018–19. Pacific Island communities are wondering what will happen if they cannot repay. 

China’s funding, however, should not be viewed as an entirely bad thing. China’s aid is helping Pacific Island countries build schools and roads. China also sends doctors and agricultural experts to the region. There are ways that China can improve its approach to aid in the Pacific, and there are signs this is starting to happen: China is attending more development partner meetings and employing more local laborers on some construction sites. In the Cook Islands, for example, China attends development partner meetings and has grant aid allocated to priority projects, and its finances are accounted for in the nation’s budget. And in Fiji, local workers are being hired on road projects, spurring local employment.

China needs to be more transparent about how much it is giving, to whom, and in what form. Hopefully, clarity will help Pacific Island governments and other development partners make decisions about where and how to best engage with China in the region, and this is precisely what Mapping Chinese Aid in the Pacificintends to achieve.