Papua New Guinea asks China to refinance its national debt as Beijing influence grows

Papua New Guinea has asked China to refinance its entire government debt in a blow to Australia’s attempts to counter China’s influence in the region.

The request marks a “significant shift” in regional politics and PNG’s allegiances, according to Pacific experts. Australia has traditionally been the largest aid donor and most important ally of PNG, but in recent years ties between China and PNG have strengthened.

PNG’s prime minister, James Marape, visited Australia two weeks ago at the invitation of his counterpart, Scott Morrison, in his first international visit since becoming the Pacific nation’s leader at the end of May.

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In a speech during his visit, Marape said he wanted PNG to move away from an “aid-donor” relationship with Australia within 10 years, and step up alongside its neighbour as a leader in the Pacific region.

However, on Tuesday, after a meeting with Xue Bing, the Chinese ambassador in Port Moresby, Marape requested that China refinance its debts of A$11.8bn (27bn kina, or US$7.95bn). PNG’s debt sits at around 32.8% of its GDP.

“[The prime minister] requested the ambassador to inform Beijing on a bid to assist the government of PNG refinance its existing country’s K27bn debt,” said Marape’s office in a statement seen by the Guardian.

“He suggested that both the Bank of PNG and [China’s] People’s Bank will take the lead with the department of treasury in ensuring that consultations are under way,” the statement continued.

“It suggest a significant shift in the relationship between Australia and Papua New Guinea and Papua New Guinea and China,” says Matthew Clarke, professor of international development at Deakin University.

“In the past Australia would have been the natural country to turn to for this sort of refinancing, but now we see China’s place in the region shift and it becomes potentially a much more dominant player in the donor relationship.”

However Clarke said that in many ways this was a “natural progression” for the relationship between PNG and China, which has grown closer in recent years.

Last year, China’s president, Xi Jinping, visited PNG ahead of the Apec summit held in Port Moresby. MPs from PNG have made regular trips to Beijing and, according to the Lowy Institute’s Pacific aid map, China pledged $3.9bn in loans to PNG in 2017, including $3.5bn for a national roads project.

There are concerns that such a heavy level of debt, and potential collateral that may be required by China, could lead Papua New Guinea into a “debt trap”, such as the one that saw Sri Lanka forced to sign over a port to China when it was unable to repay a loan.

Concerns have been raised about the high levels of Chinese-held debt in Pacific nations. Last November, the Tongan prime minister called on Pacific Island leaders to urge China to write off their debts, saying his small nation is suffering “serious” debt distress.

During Marape’s meeting with ambassador Bing on Tuesday, he asked that China consider entering a free trading agreement with Pacific Island countries. Marape has been invited to visit China.

Chinese re-financing of Papua New Guinea’s debt is likely to be raised at next week’s Pacific Islands forum in Tuvalu, which will be attended by Morrison, Marape and other Pacific leaders.

Clarke said Marape’s statement would have taken the Australian government by surprise.

“I understand that they had had similar early negotiations and discussions around restructuring and supporting a potential application to the IMF. I think those preliminary discussions will have begun and so many will have been taken by surprise.

“Beyond that, there will be concern about a potential ripple effect across the Pacific that they may see that PNG’s pivot toward China might mean a greater pivot in the region toward China as the dominant donor and that will be of concern to the Australian government.”

A spokesperson for the Department of Foreign Affairs and Trade said: “Australia welcomes support for the development needs of our Pacific partners, provided it is transparent, upholds international standards, meets genuine need and avoids unsustainable debt burdens.

“Australia has a strong partnership with PNG on economic and financial matters, including providing technical assistance on economic reforms. Australian aid has also helped PNG meet its financing needs over many years, including to help secure World Bank and Asian Development Bank loans and assisting PNG with its inaugural sovereign bond last year.”