Published daily by the Lowy Institute

Western banks are vacating the Pacific, and Nauru is turning to China

Financial risks are causing Western banks to flee the region, leaving a void for China to fill.

(Getty Images)
(Getty Images)

Nauru has signed a Memorandum of Understanding (MOU) with the Bank of China “to explore solutions and options to its banking issues”.

The China–Nauru MOU will cause further angst for Canberra at a time when geopolitical tussling and larger-than-average declines in banking services continue to affect the Pacific.

China has focused on security agreements, physical infrastructure and diplomatic courtship in the Pacific Islands, and it’s now looking for advantage in the financial sector, seeking to fill the void left by the imminent withdrawal of Nauru’s only bank – the Bendigo and Adelaide Bank. If successful, China will make more financial in-roads into the Pacific, much like in the security and telecommunications sectors, offering alternative and sometimes incompatible systems to those offered by Australia.

Bendigo Bank has delayed its exit from Nauru by six months to June 2025, presumably so another Australian bank can step into the breach. But the Chinese were quick to send a Bank of China delegation (a government-affiliated agency) to explore options. It could be another easy win following Nauru’s recent switch in diplomatic recognition to China, dumping Taiwan. 

Why does it matter?

Beyond Canberra desperately trying to minimise Chinese gains that increase Beijing’s leverage in the region at Australia’s expense, there are significant financial ramifications for Nauru and the region.

Nauru uses Australian currency. If the Bank of China replaces Bendigo Bank, it may promote the renminbi over the Aussie dollar. For more than a decade, China has tried to internationalise its currency and provide a counter-offering to Western financial services. A shift in currency would serve China’s interests while streamlining transactions between China and Nauru.

If Nauru’s replacement bank is non-compliant with global regulation, overseas banks could sever correspondent banking relationships, already occurring across the Pacific at concerning rates.

There are other complications. Nauru’s bank is highly regulated by the Australian Prudential Regulation Authority (APRA), supporting Nauru’s participation in the global financial ecosystem. If Nauru’s replacement bank is non-compliant with global regulation, overseas banks could sever correspondent banking relationships (CBRs), already occurring across the Pacific at concerning rates.

These overseas banking relationships are critical. They can be likened to plumbing, whereby one bank provides services to another across national borders. Services include international money transfers essential for remittances – money sent home from abroad. Evidence shows that Pacific Islands financial services denominated in Australian dollars do better in retaining CBRs, adding significance to Nauru’s choice of currency.

If Nauru no longer has CBRs, its government and its citizens at home and abroad will struggle to access foreign exchange, send money overseas, and pay for international services.

Another fallout could be the black-listing of Nauru if measures to counter global money laundering or terrorist financing are lacking. Or Nauru could be grey-listed, which means it would be subject to increased monitoring to address deficiencies in its regime. Either brings a risk-perception problem that is difficult to shrug off long after removal from the list. Nauru already has a history with the black list, but even if no listing occurs, a perception of weak financial management could drive global banks to withdraw services.

Finally, a switch to the Bank of China in Nauru could impact on how Western financial institutions view risk in other Pacific jurisdictions already facing CBR challenges, especially those drawing closer to China. Higher rates of withdrawal would lead to greater financial vulnerability and exclusion across the region.

What can be done?

An MOU for Chinese banking in Nauru is not a done deal.

Right now, the Australian government will be looking to other Australian banks already providing services in the Pacific (Westpac and ANZ). It may require public financial backing to help with rising compliance and administrative costs. This is not unprecedented – the recent acquisition of Digicel Pacific by an Australian telecommunications company was backed by the Australian government.

It is unclear whether Westpac will step up to the plate – last year, it ruled out expanding its Pacific footprint beyond Papua New Guinea and Fiji. Westpac is wary of banking in Nauru; in 2016, it told Nauru and companies with government links that they must close their Australian accounts due to money laundering and terrorism financing concerns. Indeed, Bendigo Bank raised the alarm then, too.

All Australian and New Zealand eyes will therefore be on the ANZ Bank to fill the gap, although further corruption allegations against Nauru could deter this well-reputed bank from venturing forward.

Could the Nauru government fill the gap? Unlikely. With a population of around 13,000, and few sources of sustainable revenue after depleting its phosphate resource decades ago, a home-grown Bank of Nauru is unfeasible.

More feasible, in the mid-term, is a regional facility to help weather the impacts of increasing CBR withdrawals. It could be designed and managed with Pacific Islands Forum members and funded by multilateral banks drawing on resources from all members.

In the meantime, other Pacific nations concerned about their financial futures will watch Nauru closely. Australia will continue to look to its own private sector to bring that whole-of-nation approach to national security we all keep hearing about.

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