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Secret US report warns about China's 'debt book diplomacy'

Chinese-aid-in-the-pacificSTAFF CORRESPONDENT | Asian News International (ANI)

WASHINGTON DC - In a secret report it commissioned recently, the US State Department has warned that China is offering a hundred billion dollars worth of loans to Australia's smaller regional neighbours in a bid to gain economic leverage and strategic and military prowess in the Asia Pacific region.

According to an article published by the Australian Financial Review at least 16 states, including Vanuatu, The Philippines, Cambodia, Laos, Thailand, Malaysia, Sri Lanka, Tonga and Micronesia and Papua New Guinea are falling for China's so-called "debt book diplomacy".

For example, the AFR article cites the case of Papua New Guinea. Historically, it has been in Australia's orbit and now news is in circulation that it has accepted Chinese loans that it possibly cannot afford to repay.

What concerns both Washington and Canberra is the fact that PNG is strategically located in the Asia-Pacific region and has significant liquefied natural gas (LNG) and other resource reserves which Beijing could have access to in the long term.

The AFR quotes co-author and Harvard researcher Sam Parker, as saying, "China is giving hundreds of billions to countries that cannot afford to repay it, and it's going to want something in return for that money."

He adds, "China's public-private economic model makes it possible to transform economic debt into strategic influence and wealth."

According to the State Department report, China is spreading its wings in the Asia-Pacific region and is well on its way to ousting the United States as a power to be reckoned with in the region.

Taking advantage of President Donald Trump's lack of economic commitment to the region, Beijing has been providing infrastructure financing to countries through the one trillion dollar Belt and Road Initiative, using institutions like the China Development Bank and the Export-Import Bank.

The State Department commissioned report warns that this "debt book diplomacy is likely to play a key role in China's multi-faceted campaign to erode strategic benefits" from America and its allies and shift the balance of power in Asia.

Vanuatu is already "deep in debt" to China and now the latter "is positioning itself to capitalise on the impending fiscal plight of the Pacific Island states," the document states.

Last month, Fairfax Media reported that China held tentative talks with Vanuatu over the construction of a military base for naval vessels in the South Pacific Ocean less than 2,000 kilometers from Australia.

China and Vanuatu both denied that any plans were in progress, but Australian Prime Minister Malcolm Turnbull has taken this claim seriously.

Turnbull has warned Beijing that Australia will strongly object to a Chinese military base in the South Pacific over fears that it could endanger regional peace.

Last month, he is reported to have sought reassurance from Vanuatu's prime minister that a China-funded port would never be used as a military base in his country.

American and Australian security experts fear that China's economic influence on Pacific nations could allow the Chinese military access to strategic defence infrastructure such as ports and airstrips near international waterways patrolled presently by the US Navy.

Andrew Shearer, a former National Security Advisor to Australian prime ministers John Howard and Tony Abbott, believes that the threat from China is real and risky and must not be ignored.

He cites the example of the Hambantota Port in Sri Lanka and how Beijing has been able to secure a 99-year-long lease to manage the port's operations because of Colombo's inability to pay off a USD8 billion loan that it took from China-controlled companies.

"The establishment of a military base in one of the key islands near our northern approaches would be a major problem for Australia," said Shearer, now a senior advisor for Asia-Pacific Security at the Centre for Strategic and International Studies in Washington.

"Australia remains an influential country in the region and an important source of support, but should step up its engagement and co-ordinate its efforts with other partners such as New Zealand, Japan and the United States."

China has poured money into Pakistan's Gwadar Port. It has invested in 760 projects in Laos. There are many examples of China using its overpowering economic muscle in countries like South Korea and the Philippines in previous years.

Beijing, according to the AFR article, is posing a challenge to traditional Western financial institutions like the International Monetary Fund, the World Bank and the Asian Development Bank.

It quotes David Lampton, director of China Studies at the Johns Hopkins School of Advanced International Studies, as saying that "China is financing a mix of "good and bad" belt and road infrastructure projects."

At the same time, he also says, "In fact, many Chinese are worried that China is throwing money into hopeless projects."

China's debt has ballooned from 141% in 2008 to more than 250% of GDP.

"I believe China is taking a 30-year perspective. The Chinese are likely to write off much, but at a strategic level, they believe that once this infrastructure is created, it will be theirs to reorienting production chains as labour costs rise and the flow of assets towards China," Lampton adds.

The State Department report recommends that Australia, India, Japan, and the United States engage in a joint dialogue in which New Delhi's role as a regional leader is strengthened to ensure rules-based order in the Indo-Pacific.

It also suggests that Washington extend support to the Asian Infrastructure Investment Bank as a bargaining chip to make China a more responsible lender.

Comments

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Chris Overland

At one level, Phil's reaction to this article makes sense. After all, it didn't need the resources of the CIA to uncover the nature of China's grand strategy in the Pacific.

That said, I think it is a serious error to underestimate just how effective this strategy will ultimately become.

History tells us that big powers like to dominate small powers within their self described sphere of influence and will do whatever it takes to achieve this objective.

So China is simply proceeding down a well trodden path and one which is entirely consistent with both its history and its current ambitions.

It amuses me when the governments of tiny and penurious countries like Vanuatu proclaim that they can and will resist pressure to allow China access to ports or airstrips. This is simply whistling in the cemetery.

The truth is that they will, eventually, do as they are told because they will have no other sustainable options.

If they imagine that simply reneging on their debts is a viable option, then they ought to look at Argentina as a guide to their likely fate.

Argentina is battling with 40% interest rates, a desperate shortage of capital and a great deal of social dislocation and misery. In addition, the government is fighting off law suits from creditors who are determined to extract their financial due from the beleaguered country.

Countries like Vanuatu are ludicrously ill equipped to cope with the impact of any economic melt down whereas the Chinese can weather global financial storms with relative impunity.

And make no mistake, the financial winter is coming. Total world debt now exceeds US$200 Trillion or 300% of world GDP, interest rates are rising (notably in the US) and, unless the rules of economics as we know them are entirely wrong, the day of reckoning for the over leveraged is coming.

It requires truly heroic optimism to believe that we collectively can somehow deleverage our enormous indebtedness without pain. There is literally no example of such a painless transition in history: the usual pattern is an enormous economic implosion followed by widespread impoverishment and dispossession.

It requires even more heroic optimism to believe that the current crop of politicians across the globe possess the insight, judgement and resolve to actually manage a successful transition onto a more sustainable footing.

In this context, in the absence of any other plan, perhaps Vanuatu and the rest of us might as well continue to whistle in the cemetery.

William Dunlop

Fiddle de do, meanwhile flower power, the Hon Julie's swanning onnnnnn.

Philip Fitzpatrick

Ho-hum.

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