Sydney: China is boosting its influence in the Pacific through a secretive foreign aid programme offering "soft loans" that many nations will struggle to repay, a foreign policy thinktank said today.
The loans amounted to a significant amount of gross domestic product (GDP) in countries such as Tonga, Samoa and the Cook Islands, giving Beijing powerful diplomatic leverage, said the Lowy Institute for International Policy.
In a report entitled "China in the Pacific: The New Banker in Town", the Sydney-based thinktank warned the soft loans, which come with a five-year interest-free period, could create a debt crisis when they fall due.
"China has pledged over $600 million to the Pacific since 2005 and debt burdening will become increasingly pressing as Chinese loans accumulate and the five-year grace periods expire," it said.
The report said China`s interest in the Pacific stemmed mainly from a race for diplomatic influence with Taiwan, which Beijing has claimed as part of its territory since the end of a civil war in 1949.
The rivalry saw some Pacific nations constantly change allegiance between Taipei and Beijing in return for increased aid, until Taiwan elected the China-friendly government of President Ma Ying-jeou in 2008.
While the diplomatic one-upmanship had cooled, China was "preparing for the worst" by offering soft loans that would ensure Pacific nations remained on its side if relations with Taiwan deteriorated, the Lowy Institute said.
"Should the warming in cross-Strait relations break down... these outstanding debts could be used as leverage against states looking to switch to recognising Taiwan in future," it said.
The report said that Chinese loans to Tonga now accounted for the equivalent of 32 percent of the country`s GDP, with the figure at 16 percent for Samoa and the Cook Islands.
Former Tongan finance minister Josh `Utoikamanu said Tonga was currently meeting its loan obligations but the size of the debt raised concerns about the future.
"This means that there is a very high possibility that Tonga will be unable to service its debts in the future," he told the Australian Broadcasting Corporation. The Lowy Institute said China regarded details of its foreign aid programme as a state secret and was sensitive to analysis of its intentions, meaning its activities were not as transparent as those operated by Western governments.
It said pressure could be brought to bear on Beijing to improve its aid practices through the United Nations or G20, "playing on China`s concern for its international reputation".
However, it said Chinese aid could play a positive role in helping build infrastructure in the Pacific if it increased transparency and was mindful of the potential debt burden facing recipient countries.