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China and India’s growing business links with PNG and the Pacific

Pacific leaders have been the recipients of largesse from India’s Prime Minister and China’s President, who met in Fiji last week. Meanwhile, a new ANZ report details the increasingly close links between China’s aid and its investment in the Pacific.

China’s President Xi Jinping met with the leaders of Fiji, Papua New Guinea, Tonga, Samoa, Vanuatu, Micronesia, Cook Islands and Niue on the first state visit to Fiji by a Chinese leader. It followed the G20 summit in Brisbane.

Xi invited Pacific leaders to take a ride on the Chinese ‘express train’ of development, and confirmed a series of aid measures that had already been agreed to last year (see box below).

That ‘express train’ is impressive, as China is now the second largest economy in the world, producing over US$10 trillion in output per year.

Evolution

China’s financial flows into the Pacific region have evolved from a model of grants and interest-free aid loans to concession loans and, more recently, foreign direct investment, according to the latest ANZ Pacific Quarterly.

Over the past four years, China’s aid assistance to the Pacific has edged higher to 4.2%, from 4.0%, of their total aid wallet, to a total of US$900 million (K2.3 billion).

The shift toward more direct investment coincides with greater trade activity. In the last decade, Pacific imports from China jumped from 2% to 15%.

‘However, we believe one of the main drivers of this increase in trade flows is due to sourcing preferences for Chinese material and labour with their investment and aid activities,’ say the report’s authors.

Imports from China doubled to 15 per cent of all Pacific imports in the last four years, pretty much in line with investment growth.

PNG, Samoa and Fiji received the largest amount of investment from China in that time.

Revenue-generating projects

China’s foreign aid shifted away from traditional non-committal grants and interest free loans to concessional loans, which have increased from less than 30 per cent of the total aid package to more than half.

‘This suggests that China is leaning towards supporting good quality aid projects that have revenue-generating capacity and is prepping the ground for private investment which would similarly need a return on their investment to participate in the economy,’ say the Singapore-based ANZ analysts, Eugin Lee and Daniel Wilson.

‘Similar to China’s aid programs, Chinese investment projects tend to source materials and labour from China.’

Those resources are iron and steel and manufactured metals which show that ‘aid and investment are still largely focused on infrastructure developments although industrial activity could emerge over the medium term’.

Modi

The visit earlier in the week by Indian Prime Minister Modi’s after the G20 summit arguably made a bigger public splash ‘largely because of his international rockstar reputation and his ability to connect with diaspora communities’, says the Low Institute’s Jenny Hayward-Jones.

‘Unlike Xi, Modi was welcomed by large crowds of enthusiastic supporters in Suva,’ she says.

And while Modi announced a package of initiatives for the region (see box below), ‘they are relatively minor contributions to development compared to those made by the region’s major donors,’ adds Hayward-Jones.

‘Modi’s speeches and remarks in Fiji suggest India’s relationship with the Pacific Islands region will remain largely focused on Fiji, either as the target of India’s attentions or as a ‘hub’ through which India engages with other Pacific Island countries.’

China & PNG

‘China’s growing presence in the region is evident and individual Pacific Island Countries should focus on expanding relations through business and trade and investment, capacity building, tourism, agriculture and fisheries with China,’ said PNG Prime Minister, Peter O’Neill in Fiji.

Earlier this month, he met with the chairman and president of China’s Exim Bank, Li Ruogu, in China.

In a statement afterwards, he said he was confident the bank would continue to expand its investment in PNG including the upgrade of the Highlands Highway and national broadband internet system.

‘Currently, 80 per cent of China Exim Bank’s total loan and project financing commitment in the Pacific region is dedicated to Papua New Guinea.

‘Current funding includes the construction of roads from the Southern Highlands to Kikori in the Gulf province, and significant investment in the Ramu Nickel project in Madang.’

O’Neill said the discussions had moved closer to agreement on the funding of a water treatment project and the National Broadband System.

‘Chinese businesses see the growth potential of our economy, and are particularly interested in investing more in mining, forestry, agriculture, fisheries and ports,’ he said.

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