CHINA LOANS INCREASE LEVERAGE IN PACIFIC

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Pacific owes China $600 million

MELBOURNE, Australia (Radio Australia, April 4, 2011) - A new report warns China is gaining political leverage as it rapidly expands its loans to Pacific Island governments.

The report, to be released by the Lowy Institute on Tuesday, says China has pledged over US$600 million to the Pacific since 2005.

China is the biggest lender to Tonga with loans worth 32 percent of Tongan Gross Domestic Product.

Samoa and the Cook Islands have loans worth 16 per cent.

The author of the Lowy report, Fergus Hanson, says those funds are increasingly in the form of soft loans rather than grants.

He has told Radio Australia that maintaining the support of Pacific nations for China's sovereignty claim over Taiwan may explain the trend.

"One possibility is that they're trying to build up leverage with Pacific island countries in the event that there is a return to dollar diplomacy and diplomatic competition with Taiwan," he said.

"There's a need to exert pressure on them to maintain relations with China."

The report says debt burdening and aid co-ordination with China are pressing issues for the Pacific governments, Australia and multilateral aid donors.

In some countries, Chinese debt is threatening to overwhelm.

[PIR editor’s note: Standard and Poors, Kyran Curry says Chinese debt is difficult to ignore because the loans coming from China is not tied with the same conditions an ADB loan would have like openness and transparency. Chinese loans come with conditions to accept Chinese workers and are not necessarily utilized to enhance economic growth.]

Tonga's former Finance Minister, Josh 'Utoikamanu, says it is possible that health and education services in Tonga may need to be cut to pay back loans to China.

Last week the International Monetary Fund warned Tonga is at risk of debt distress.

Mr. 'Utoikamanu told Radio Australia it is very likely that Tonga won't be able to service its debts in future.

Tonga's debt servicing commitments are expected to grow between 70 and 100 percent in the next 5 years.

Mr. 'Utoikamanu warned that if Tonga goes into debt distress it will have to scale back spending on government services to meet its loan repayments.

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