Monday 23 May 2022 | 15:36 | SYDNEY
Monday 23 May 2022 | 15:36 | SYDNEY

Are Chinese soft loans always a bad thing?

29 March 2012 15:48

Graeme Smith is a Postdoctoral Fellow at the China Studies Centre, University of Sydney and a Visiting Fellow with the State, Society and Governance Program in Melanesia Program, ANU.

When the nationwide anti-Asian riots of May 2009 reached the Highlands of Papua New Guinea, the targets were the same as those of earlier riots in Port Moresby and in Lae. Shops run by newly arrived migrants from the Fujian province of China were burnt and looted. Police responded with volleys of tear gas in West Goroka.

Beyond the barbed wire-encased stores and kai bars, Goroka was home to another Chinese population. Over a hundred workers were erecting a seven-storey dormitory at the University of Goroka (the white building in the background; photo by the author).

Tipped off by the Fujianese shopkeepers, the Chinese builders told university staff that a mob was on the way, and they were spirited into the university library. When word spread, a throng of students was waiting for the looters at the university entrance, informing them in non-academic language that no one was going to touch their Chinese, who were building their dormitory. To my knowledge, this was the first instance of a pro-Chinese demonstration in the Pacific.

With Chinese retail investment providing fuel for nationwide riots, Chinese mining investment characterised as 'neo-colonial slavery', and the Lowy Institute maintaining criticism of China's Pacific aid program, why is the Goroka project different, and what implications does this hold for Australia?

The first possibility is that the company involved in this project, Guangdong Foreign Construction (GDFC), is a better corporate citizen. But this does not seem to be the case. Before winning the contract in Goroka, GDFC built student dormitories and teachers' houses in Rabaul, at the University of Vudal. This project, supported by a Chinese Government grant, became notorious when staff and students from all over PNG were housed there for the 2008 Intervarsity Games. They saw flaking paint, cracked ceilings and shoddy fittings. It was Chinese aid and construction at its worst, down to the bright red roof.

And yet GDFC won the tender for Goroka's dormitories. At the time, university staff and the Department of National Planning were opposed to GDFC's involvement, but in retrospect, GDFC's selection is seen as a godsend. Soon after starting work, GDFC management took university administrators out to dinner at a Seventh Day Adventist restaurant, and proposed a Chinese government concessional loan to build more dormitories. As one dinner guest explained, 'they needed the work; we needed the money.'

In a similar spirit of frank discussion, I put forward a couple of heretical theses:

  • Soft loans, even Chinese ones, aren't always bad things.
  • Chinese 'aid' is often a bottom-up rather than a top-down process.

'Aid' earns scare quotes because no one can agree whether a loan charged at two percent interest is aid. The Department of Foreign Affairs and Immigration sees it as a commercial deal, and has delayed the issuing of visas. The National Executive Council, which awarded tax and visa exemptions, sees it as aid. GDFC sees it as grant aid, arguing that the loan will be forgiven. In the Memorandum of Agreement between GDFC and the university, it is awkwardly referred to as 'a kind of China-aid project.'

Whether it is a grant or a loan affects local control and ownership. With a grant, local partners have little leverage. As a University administrator explained, '(t)he difference is that this is a loan. Even if it is a soft loan, we're still going to pay them back. So it's really the government of PNG paying for it. We're in total control of it.'

My thesis that Chinese infrastructure companies in the Pacific, not aid agencies in Beijing, are driving aid requires more substantiation. Yet for those with even a passing familiarity with China's polity, it is a no-brainer. The Chinese central government lacks full agency and control within its own borders; why would it enjoy it outside of them?

This lack of control can lead to better outcomes for Pacific nations. In the case of the dormitory project, the tail wagged the dog. GDFC successfully lobbied Exim Bank in Shanghai. The contractor, rather than the lending agency, penned the initial loan agreement. Remarkably, the university and the lead architect in PNG were able to push back, persuading Exim Bank to accept their terms for the design and supervision of the project, because they were competitive on price, and arrived at the negotiating table with plans and standards to hand.

This successful push-back by the university shows how Australian agencies such as DFAT, AusAID and Treasury can make a positive difference to the Pacific's reception of foreign aid. China has the finance to build the infrastructure the Pacific needs, and there are Chinese infrastructure companies that need the work. Demonizing such loans or encouraging Pacific leaders to 'just say no' is foolish. Naïve even.

A more useful approach would be to assist Pacific partners to reduce the asymmetry of power when loans are being negotiated, coordinate with Chinese infrastructure companies based in the Pacific, and perhaps even revisit the idea of trilateral cooperation in aid projects. Hopefully, with a new foreign minister, we'll move beyond Manichaean concerns about whether China is a force for 'good' in the Pacific, and not miss the chance to help Chinese investment benefit the people of our region.