Chinese Capital in the Pacific

Written By: - Date published: 8:23 am, July 19th, 2022 - 26 comments
Categories: China, debt / deficit, Economy, International, Nanaia Mahuta, Pacific, uncategorized - Tags:

It would be tidy for New Zealand and Australian leaders to blame China’s debt within Sri Lanka for its collapse, so that they could scare Pacific Island nations back into the fold. It would be wrong.

A lot of good came out of the Pacific Island Forum and in particular the 2050 Blue Pacific strategy, and some big new diplomatic investments by the United States.

But in this interview with Jack Tame, the Minister of Foreign Affairs traverses a lot of ground, but from 9.20m discusses how mindful the government is about the collapse of Sri Lanka.

You’ll be aware that the way New Zealand funds is largely by grant funding. We would like to see the opportunity of development partners to look towards greater coordination of its efforts,” said Mahuta.

“I’d say there’s a level of indebtedness that sits across the whole of the Pacific to financial institutions, including the way in which China has funded into certain countries.”

The minister described it as a “key area of vulnerability that should be addressed, and we need to find different ways to work together on the challenges that sit within the Pacific.”

Sometimes, however, it’s better to see what’s on the ground causing civil unrest before reaching for blaming other countries. The Pacific Forum was Chaired by a person who had led coups in Fiji. Its own multiple coups were caused for the most part by native Fijian-origin military and paramilitary groups seeking to ensure Indo-Fijians didn’t achieve parliamentary rule.

In the Solomon Islands, troops and police from Fiji, Australia and New Zealand have been invited in several times over the past decade to restore order after inter-ethnic fighting broke out. It stems from a really poorly handled internal decision to switch recognition of Taiwan to that of China, which cut off critical Tainwanese aid to parts of the Solomon Islands. It’s complex but aid withdrawal was at its base. The US stepped in with massive replacement aid but the cack-handed damage was done.

Further back, in 2006 New Zealand and Australian troops were invited to secure Tonga’s main city and airport after massive riots. Tonga has a messy and multi-layered relationship between authoritarian monarchical rule, feudalistic restrictions of political rights, cultural patronage, massive inequality, and a very low wage economy. Their path to greater democracy was and is very, very hard.

In none of those examples did Chinese state loans cause civil unrest. Nor in any of them was New Zealand out of the picture.

And so to Sri Lanka. Certainly China financed a billion dollar port+airport at Hambantota, but then accepted a lease of the property in place  of much of the repayment. At 99 years it’s more like a equity-for-debt swap.

And of course it was in Rajpaksa’s constituency, ‘nuff said. But the lessons out of Sri Lanka that New Zealand can draw are simpler, and little to do with how China forms debt agreements within Pacific island states.

The first lesson is very very few small states will ever have the headroom to massively slash income taxes, as the Sri Lankan government did in 2020. VAT was halved from 15% to 8% and many other taxes minimised. Well, state got no money. Fiscal deficit soared to 11% of GDP. Those lenders that had hung in there for a long time like the IMF were just shown empty pockets. No party that promises massive tax giveaways can also promise that the state will stay stable.

The second lesson for New Zealand is that the fastest thing we can do to stop layabouts on the streets looking for trouble, is get them jobs here. Developed countries like us have that power. Talk a lot less about medium term hero projects for climate change and more about dollars and cents to get cash into small island villages. We will need the workers particularly in horticulture, until such time as we get much greater harvest mechanisation. We caused stress through shutting them out during COVID.

A big lesson for countries that are striving their way out of subsistence and poverty is that they will stop getting access to highly concessional loans from the IMF and World Bank – so that’s the point where very kind lenders or donors like New Zealand, Australia and China need a whole bunch less suspicion of each other and a lot more coordination of what they are actually funding. Surely the PIF can do an actual job of coordinating that rather than complaining.

Sri Lanka’s farmers also give New Zealand a much more direct lesson, namely: you can’t force organic farming on farmers and banning fertiliser imports. When Sri Lanka’s government tried that to decrease import costs, rice and tea harvests crashed 20%.  Dilmah Director Malik Fernando gives a sense of how Sri Lanka is continuing to rebalance tea production and tourism amongst the crisis:

Tourism continues without any untoward incident. Citizens have been protesting the government’s mishandling of the economy. Demonstrations have been peaceful, barring a few at the start where protesters were dispersed by the police. Sri Lankans from all walks of life came together peacefully and demanded that the government step down. The entire cabinet resigned. There is a strong sense of unity. Tourists have also joined the protests in some places. Although it may look worrying in the news, there’s no risk whatsoever to tourists.”

Now, granted he’s entitled to his advertorial spin, but he points to a very simple lesson for New Zealanders: the easiest thing you can do to build up a small island state is go there on holiday. Take your family and NZ$5-$10k and buy everyone some happiness. Stop scolding farmers about how to produce, and instead help them diversify their economy. After all it worked here.

None of the above examples of disruption had a Chinese debt trap as their cause. All of them have solutions that don’t necessarily require more loans or more grants for whatever reason. Our New Zealand government needs a whole bunch less political suspicion about sovereign loans, a whole bunch more focus on actual jobs that give Pacific Island families cash in hand, and actually an acceptance that – just as New Zealand did in the 1990s real estate market – Chinese money is a permanent part of our picture.

26 comments on “Chinese Capital in the Pacific ”

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  1. Stuart Munro 1
    19 July 2022 at 10:29 am

    Well your opening thesis is pretty sound, that China's involvement in Sri Lanka, if not benign (and lets face it, foreign investment is never entirely benign), does not appear to have been a major factor in the debacle that saw there government flee the country to avoid the natural and evitable consequences of their gross irresponsibility.

    China's expansion of interests into the Pacific thus far is more of a threat to competing predatory financiers than to the security of the region. And as long as they proceed carefully, and do not take advantage of the moral flexibility of of small state politicians too often, that's really none of our business. Incremental change, as opposed to the breakneck folly of Roger Douglas and his accomplices, is normal, and, because it allows the time for political responses and reviews, it is invariably more legitimate. Xi has appointed himself president for life, but thirty years on a less bellicose leader may control China, and the internal issues that have always been the major focus of that state are likely to keep him or her busy enough without strange dreams of conquest.

    The fastest thing we can do to settle things down in Sri Lanka is of course to impose a 10% annual property value tax and ship them the money as development aid. Ridiculous? Yes of course – as ridiculous as flooding NZ with even more migrants while we're still struggling to assimilate the extra million people MBIE asininely let in over the last two decades. These unskilled workers will take 30-40 years to work their way through the belly of the beast and allow wages to reach a natural equilibrium – until that time NZ workers have trouble enough keeping roofs over their heads without subsidizing the more egregious failures of foreign politicians.

    Nor should we derive excessive generalizations about the adaptability of farmers or the prospects of environmental reform from what seems to be an unremarkable instance of elite incompetence. The fastest growing (in value) sector in food are those products that are organic or sustainably produced, ideally both. Typically in the realm of 30%. NZ farmers are poised to swoop on that fat profit potential as soon as they get the sclerified old brown Fed crew's boot off their necks.

    • psych nurse 1.1
      19 July 2022 at 11:24 am

      I was in Sri Lanka in 2019 soon after the bombings, we must of been about the only tourists there, the tourist industry was in utter despair. But the astounding thing was the eight lane highway from Negombo to Colombo, built by the Chinese using Chinese prison labour according to the Taxi driver. He said the locals only realized when no locals were employed and all the cats, dogs and lizards disappeared from the streets as the labourers were not fed. There was also a massive port being constructed in Colombo all on a form of buy now pay later. Its obvious now the debt has been recalled and the Chinese will extract their pound of flesh.

      • RedLogix 1.1.1
        19 July 2022 at 11:36 am

        built by the Chinese using Chinese prison labour according to the Taxi driver.

        Yes – I have seen something similar myself working in Panama. We had a group of about 100 Chinese laborers doing light mechanical worlk (installing insulation and the like) who we treated like something out of concentration camp movie. One morning I thought to take a video of it from a distance – and was very quickly shut down by one of their white hat guards. They knew damn well what they were doing was fucked up. Or North Koreans.

        I was told the workers were likely forced labour taken from some very poor region in the interior.

        • joe90 1.1.1.1
          19 July 2022 at 12:32 pm

          My brother said much the same about routine air frame rebuilds in China. Hundreds of workers in crammed into deafeningly loud, sweltering and poorly ventilated fuselages being pushed along by stick-wielding overseers. Little wonder they have the record turn-around times so beloved by airlines.

        • Adrian Thornton 1.1.1.2
          20 July 2022 at 9:51 am

          Interesting to note that the industrial and manufacturing component of the post war Western Capitalist ‘democratic’ ideology you defend so vigorously on this forum has been enabled to grow over the past few decades almost exclusively through the exploitation of those very same workers…and many other exploited nationalities of course…as we all know, capitalism sees no colour in its endless search for profit….

          So correct me if I am wrong, but I don't seem to remember any problems with China and Chinese workers being issued from the West when they being outrageously exploited by all western countries including New Zealand for huge profit…but now that they are a perceived challenge to Western (mainly US) economic hegemony, we are expected to suddenly forget all that history from literally yesterday, and regard them as the biggest threat to our way of life today…FFS.

          The thing I find endlessly intriguing about the Liberal class is how crazily and outrageously racist they often are, yet they seem to genuinely not even notice it…sort funny and annoying at the same time.

          • RedLogix 1.1.1.2.1
            20 July 2022 at 10:03 am

            Fuckwit.

            It was of course Chinese owned and operated contractors who were charging these poor sods out at Western rates – and paying them sfa.

            The exploiters here are Chinese. Shove your racism …

          • Tiger Mountain 1.1.1.2.2
            20 July 2022 at 10:18 am

            I know it is pathetic Adrian –$80 branded T-shirts for sale in Auckland, made for cents in Bangladesh by exploited workers with horrifically toxic dye methods, latest iPhone “designed in California” made in China.

            US companies “ran away” for cheap labour long ago. That is why I am an internationalist–“Neither Washington, Moscow or Beijing”.

            Obviously Russian and Chinese workers have to get organised in numbers, but so do US workers–and look what happens when they try to at Amazon and Starbucks!

            • RedLogix 1.1.1.2.2.1
              20 July 2022 at 10:27 am

              latest iPhone “designed in California” made in China.

              Well take heart – skilled labour in China is now quite expensive. Even Apple who have repeatedly doubled down on their commitment to Chinese manufacturing are re-considering.

              The bell-weather on this is automation. Investment in both SE Asia and the US is exploding for two complementary reasons – many US based companies are re-shoring their manufacturing as fast as they can in order to regain control and certainty over their supply chains. In order to do this both US based and Asia based entities are investing hard in automation in order to contain soaring labour costs.

              The calculus many companies are now making is that even if Asia remains cheaper on a per unit basis – China now presents an unacceptable sovereign risk to the whole Asian region and reshoring is the best bet in the long run.

            • Adrian Thornton 1.1.1.2.2.2
              20 July 2022 at 3:38 pm

              @Tiger Mountain +1
              "That is why I am an internationalist–“Neither Washington, Moscow or Beijing”

          • Adrian Thornton 1.1.1.2.3
            20 July 2022 at 3:35 pm

            I might well be a fuckwit RL, but at least I am not a racist fuckwit.

            • Jenny how to get there 1.1.1.2.3.1
              21 July 2022 at 8:32 am

              But you are a genocide denier, and an open supporter of fascist style Russian backed dictators.

              Which would sort of contradict your statement that you are neither Moscow, Washington or Beijing.

              [Your comment adds nothing to the debate and only attacks another commenter without any substance even when that other commenter’s comments are infuriating you because of their tone, style and/or contents. This flaming has got to stop. Take a week off and next one will be doubled – Incognito]

              • Incognito …
                21 July 2022 at 9:11 am

                Mod note

                • RedLogix …
                  21 July 2022 at 10:16 am

                  Nah. I'm fed up with AT's blatant lying as well.

                  • Incognito …
                    21 July 2022 at 10:54 am

                    Aren’t we all?

                    Still, anybody who just attacks the messenger without any (other) substance in their comment can expect to be moderated, at least, and possibly receive an educational ban. As a reader, commenter, and a moderator of this site I’m fed up with those personal slurs, pot shots, attacks, et cetera. No matter how tempting it is to lash out at an infuriatingly obnoxious commenter and no matter how much the other ‘asks for it’ and/or ‘deserves it’, and trust me, I’m also ‘tempted’ a lot …

                    Collectively, we can choose to lift the tone and quality of the comments here and I’d like to think we [can] do this without heavy-handed moderation. But patience is wearing thin with some, obviously, and the time of kind warnings, gentle nudges, and soft moderation is coming to an end.

    • RedLogix 1.2
      19 July 2022 at 8:28 pm

      A country run as a family business. In a word – nepotism.

      • Stuart Munro 1.2.1
        19 July 2022 at 8:43 pm

        Yes I saw some of that in Shanghai – construction worker camps with ash piles outside them.

        "Bonfires?" I asked my host.

        "Funerals".

  2. bwaghorn 2
    19 July 2022 at 11:28 am

    “”Sri Lanka’s farmers also give New Zealand a much more direct lesson, namely: you can’t force organic farming on farmers and banning fertiliser imports.””

    I hope the greens are paying attention, just on the off chance they have some real power next year.

    • barry 2.1
      19 July 2022 at 4:50 pm

      The narrative is about the government of Sri Lanka wanting to to go green. In reality it was the government refusing to use foreign reserves to pay for chemicals. Going green is not just about stopping using chemicals and the Green party is not advocating for a cold-turkey on them.

      • bwaghorn 2.1.1
        19 July 2022 at 8:49 pm

        Didn't suggest they where but ,I'm sure there's a couple of em that'd love to shut down modern farming forthwith, so just thought I'd preempt them 🤔

  3. Obtrectator 3
    19 July 2022 at 12:35 pm

    "The first lesson is very very few small states will ever have the headroom to massively slash income taxes, as the Sri Lankan government did in 2020."

    Careful how you construct your sentences. I took that to begin with as implying Sri Lanka did have the said headroom. (It didn't, of course, as further reading made abundantly clear.)

  4. barry 4
    19 July 2022 at 5:01 pm

    I am off to the Cooks next week to support their economy. I am not expecting that my tourist dollars will actually result in many jobs for the locals, and I expect that tourism will be having many negative effects on the environment and wealth distribution. I suspect that tourism is only a small part of the answer to the economic problems.

    There is a need for climate change resilience work. Tsunamis in Tonga and storms in the Cooks recently have demonstrated the vulnerability of the islands, and local labour can be used to maintain defences, build up water infrastructure etc.

    RSE labour and remittances from NZ-based family members allow people to buy imports.

    Spending a lot of NZ/AUS/US/Chinese money does have down sides as it causes inflation and imbalance. Imports drive out local enterprise. Prices rise and the people without foreign income suffer.

    I agree that Chinese loans are not the problem. The problem is the failure to establish sustainable industries (e.g. fishing) that can employ people and sustain a truly local economy which earns enough to support the whole population.

  5. Maurice 5
    19 July 2022 at 7:55 pm

    We must remember that "Chinese Money" is in effect recycled US Money that went from the US to China in exchange for Chinese Manufactured products. That is why China has a huge US Dollar surplus which can be utilised for the Belt and Road expansion

    Very much a US own goal?

    • pat 5.1
      19 July 2022 at 8:05 pm

      And most of that USD earned by China went straight back to the US.

      • Maurice 5.1.1
        19 July 2022 at 9:37 pm

        A lot of it used to buy US land, commercial enterprises and other 'hard' assets

        2nd own goal?

        … and quite major investments here too

        From MAFT website: https://www.mfat.govt.nz/en/countries-and-regions/asia/china/

        Investment from China including Hong Kong into New Zealand reached NZ$10.6 billion in 2018. After Australia, China is New Zealand’s second largest source country for foreign direct investment, representing almost 10% of our total FDI stock. Chinese investment extends across a range of sectors including primary industries and forestry (30%), infrastructure and commercial development (20%), and manufacturing (15%). Chinese investors are the largest foreign investors in primary products exports, waste management, electrical whiteware, and tourism infrastructure. New Zealand’s limited overseas direct investment in China is mainly concentrated in the dairy sector.

        • pat 5.1.1.1
          19 July 2022 at 9:44 pm

          China is the largest creditor to the US government with over 1 trillion of US Treasury Securities