A new report from the Lowy Institute has dismissed claims that China is deliberately engaging in 'debt-trap diplomacy' in the Pacific, but warns that the scale of Chinese lending and weak institutions in Pacific states pose significant risks of unsustainable debt.
The report, titled 'Ocean of Debt?', notes that China's Belt and Road Initiative has highlighted the issue of debt sustainability for less-developed countries, particularly in the Pacific. However, the authors argue that accusations of intentional debt-trap diplomacy are not supported by evidence, at least so far.
'The evidence suggests China has not been engaged in problematic debt practices in the Pacific as to justify accusations of debt trap diplomacy, at least not to date,' the report states. 'Still, the sheer scale of Chinese lending and the lack of strong institutional mechanisms to protect the debt sustainability of borrowing countries mean a continuation of business as usual would pose clear risks.'
Pacific states are particularly vulnerable due to small populations, fragile economies prone to shocks such as oil price hikes or natural disasters, and weak governance. The report notes that Chinese assistance is often faster and less conditional than that of traditional donors like Australia, but has been criticised for poor quality and lack of due diligence.
The report calls on China to substantially reform its lending practices to avoid fulfilling the debt-trap accusations of its critics, and warns that an infrastructure arms race between China and other countries in the region could exacerbate the problem.
