SILK ROAD BRIEFING – DEZAN SHIRA & ASSOCIATES – Jun 13, 2019
Op/Ed by Chris Devonshire-Ellis
China has been reaching out to the Pacific Island nations, albeit with some care as it doesn’t wish to rub up against the reach of the United States, and to a lesser degree, Australia and New Zealand within the region. Nonetheless, there have been attempts by China to bring them into the Belt & Road sphere, not least because each of them add another notch to China’s attempts to brand it as a global initiative. The islands are a mixed bunch, split between well established (and some exclusive) tourist resorts, while others are fairly poor, with infrastructure in need of improvement, and with mainly fishing and aquatic products as industries. One, Niue, attempted to become an offshore financial center, yet paid the price for a lack of transparency and ended up being blacklisted over transparency and money laundering concerns. The fact that it was administered by the now notorious Panama offshore financial firm Mossack Fonseca should be no surprise.
Most though are also threatened by global warming and are recipients of Asian Development Bank funding to cater for this in the form of flood prevention schemes and so on. While small, however they do represent a diplomatic opportunity for China, especially if the country can step in where others have tried and failed. Many, if not funded by larger nations, would cease to be viable communities. China’s involvement could be seen as a welcome change from financial aid being currently provided from elsewhere.
The countries that have signed up to China’s Belt & Road Initiative within the Pacific include:
Of these, only New Zealand has a Double Tax Treaty with China. Several others partially lie under the careful eye of either New Zealand or the United Kingdom. China’s involvement with bringing these into the Belt & Road Initiative has not been without controversy. Although self governing, Cooks and Niue islanders also have passports issued by New Zealand and are de facto New Zealand nationals and usually considered to be under New Zealand’s laws. China’s signing Belt & Road MoU with the Cook Islands and Niue caught Wellington by surprise, as did news that China would be building a deep water port on Penrhyn Island in the Cooks, and a 64 km expressway around Niue while also upgrading wharves and ports. China has also paid Rarotonga, the seat of the Cook Islands government, several million dollars in fishing license fees for blue and yellow fin tuna for domestic Chinese consumption. It’s also rubbing Wellington up the wrong way, New Zealand has budgeted some US$14.6 million in 2018-2019 to support Niue, and is seeing prize assets being sold elsewhere. The islands tourism make up is also expected to change with a large influx of both Chinese hotel development cash and tourists expected to be on the scene over the next few years. None of that will flow into New Zealand’s coffers.
In terms of Fiji, Chinese in-bound tourism is also very much on the cards. Li Haolin, general manager of Guangdong Silkroad Ark Investment Company in Fiji, is quoted on CGTN as being in the midst of building a beachside hotel. Li says the hotel’s design represents the merging of cultures. The design is in line with Fiji’s local customs and the culture of the ancient Silk Road. Our investment will not only boost local tourism and the hotel industry, but also provide employment to many local people.” One could read that as meaning it will be a Chinese hotel built exclusively to cater for Chinese states and effectively ghettoize Chinese tourists away from locals, who are not considered target guests. That is what has happened at the Marriott Hotel spa and resort in Welligama, Sri Lanka, which is exclusively targeted in practice if not in public at mainland Chinese tourists to the exclusion of locals, who only exist to provide service to guests. Non-Chinese do not feel welcome at the hotel, and it is example Fiji would be advised to steer clear of.
However, another lucrative sector in Fiji is cosmetics, with many splurging on the country’s world-famous skin-care products. Chinese businessman Shan Yuqiang, general manager of Fiji International Trade Company, saw an opportunity, and is now selling these products in the Chinese market. He said, “Fiji’s natural skin care products are very famous. Many Hollywood stars like it. So after negotiations with the producer, I got the dealership for their products in China. After President Xi’s visit to Fiji in 2014, Chinese people got to know Fiji a lot better. And our business is good.”
Micronesia meanwhile is a scattered group of islands, with most residents living in small villages. China again has signed off lucrative fishing licenses that will see Micronesian catch exported to China.
Samoa receives grants from China, and Samoan Prime Minister Tuilaepa Sailele Malielegaoi has been talking up the benefits of joining the Initiative. “The Belt and Road Initiative is opening a vast market and bringing lots of opportunities for the world, particular for the small countries like Samoa in the South Pacific region in this difficult times and challenges posed by climate change.” he said, in an interview with Xinhua. He also criticized those pushing the “debt trap” argument, saying: “We are fortunate to have grants from China. I think all the allegation (of the China debt trap) is based completely on misunderstanding of the issues involved.” That indicates that Samoa will probably request more funding from China. The main industries in Samoa are tourism, fishing and agriculture. In the latter, coconut and processed coconut feature prominently. Samoa is close to American Samoa, which remains a US territory and has not joined the Belt & Road Initiative. The distance between the two islands is 164km, a 20 minute flight. Passports and accreditation from the United States is required to enter American Samoa.
Tonga meanwhile has had its US$115 million worth of debts suspended by China for five years. Tonga first borrowed from China about ten years ago, when mass-protests in the capital Nuku’alofa dealt severe damage to its private and public sector enterprises and infrastructure. This was followed by damage caused by Cyclone Gita early last year. Those debts have been postponed until the scheduled principal repayments of the existing loans, meaning China has effectively written off interest payments. There had been some criticism of the China-Tonga loan agreement, and although the Tongan government rebuilt the city with Chinese financing, and the roughly $65 million in China’s initial loans to the island now stands at that $115 million mark, due to interest and additional borrowings. This represents almost one-third of Tonga’s annual gross domestic product. Much of the rebuild has been re-classified as “Belt & Road” related.
Vanuatu has stated that it will seek additional finance from Beijing as a result of its Belt & Road Initiative agreement, with Vanuatuan Prime Minister Charlot Salwai stating yesterday that “We are an independent country, and we can’t wait for grants to come,” he said, citing the need for projects in hard infrastructure like roads and ports, and also telecommunications, utilities, health and education. Whether through grants or through loans we have to have money to build our infrastructure, we want to invest this money into economic sectors.” he said, adding that funneling money into productive projects would also help it pay back its existing debt and develop the economy. Salwai is due to meet Chinese President Xi on May 26th in Beijing.
Belt & Road Pacific Islands At A Glance
|Region||Population (thousands)||GDP (millions)||Ultimate Sovereignty|
|Cook Islands||17.5||345||Self governing, supported by New Zealand|
|Fiji||885||4,890||Independent, supported by United Kingdom|
|Micronesia||104||328||Independent, supported by United States|
|Niue||1.7||26||Self governing, supported by New Zealand|
|Tonga||108||455||Kingdom, supported by United Kingdom|
|Vanuatu||276||870||Independent, supported by France and United Kingdom|
(These figures place the Pacific Islands population, in collective terms similar to Copenhagen, Ottawa or Guilin. In terms of collective GDP, they are roughly equivalent to Belize, and slightly less than the Maldives and Bhutan, but higher than the Seychelles). Looking For Belt & Road Tax Incentives To Sell To China? Click here
Concerning the sovereign state of the Pacific Islands, both Wellington and London appear to have been caught out by the Chinese approach. They stand to pick up significant damage limitation costs should the Belt & Road experiment with China go wrong, and it seems somewhat remarkable that neither country paid much attention to what has been going on. The situation concerning Micronesia, which although independent and known officially as the Federated States of Micronesia, yet historically supported by the United States, is also unusual. The Northern Micronesian islands – Guam, the Northern Mariana Islands and Wake Island remain part of the United States territorial claims and are not part of the Belt & Road Initiative, placing China in a position where it may seek to make a statement and develop its friendships with the parts of Micronesia under the BRI to a higher degree of success than that provided to the neighboring islands under US sovereignty. It is also true that while much of the ambiguity concerning the historical, tourism and funding ties of much of the Pacific Islands do not lie with China, that is about to change. Need Intelligence About Chinese Overseas Tourism Behavior? Contact Our Business Intelligence Team here
It is also apparent that New Zealand entrepreneurs when it comes to the Cook Islands in particular may have been missing a trick. New Zealand has been a major source of income and tourism into the Cooks for decades, yet they are about to be supplanted by Chinese investment and tourism in their own backyard. New Zealand is a signatory to China’s Belt & Road and should be a primary mover in getting involved with direct Chinese investment into the Pacific Islands. But it appears to have lost any vision of the Pacific Islands possibilities as being open to investment. Yet perhaps this is not too late; New Zealand possesses a Double Tax Agreement and a Free Trade Agreement with China, and these can could be utilized to structure investments into the Pacific Islands. Yet one thing is certain – Chinese money is pouring in to the Pacific Islanders lives and they will be repositioned as destinations for generations of Chinese tourists. In the meantime, the Pacific Island governments would be well advised over monitoring fishing licenses they have sold. China has a huge and hungry consumer market and the waters around the Pacific could easily be drained of Pelagic fish in a matter of years if proper checks and balances are not deployed. Inviting China in to fund increased tourism and develop fisheries is one matter, policing them to ensure the Pacific Islands are not entirely overrun and depleted is quite another. Due diligence in tourism and fishing needs to be put well into place for these most fragile of Belt & Road regions. The Belt & Road development opportunity for the Pacific Islands needs to be meticulously managed, otherwise it won’t be global warming that provides a threat to their existence – it’ll be Chinese tourists and fishing vessels that are culpable. This is a Belt & Road investment party that needs strong oversight.
On the other hand, given the relatively close proximity of China to the Pacific Islands, local businesses and New Zealand entrepreneurs should be looking at the tourism logistics. 30,000 mainland Chinese tourists visited Guam in 2018, and as that is US territory, Beijing will be wanting to redistribute those elsewhere and especially to its new Belt & Road Initiative friends in the South Pacific. The Cook Islands, Fiji and Tonga in particular should be conducting studies into how Chinese tourists behave, especially in the middle market sector, which has its own peculiarities and requires attention to ensure visitors leave more dollars on the table, and resist the efforts of purely Chinese operators controlling every moment. The trick is to enter into service industry facilities that are locally, not Chinese operated, although these could be structured as local joint ventures. Businesses in the Pacific Islands need to pay attention to the added value details and operate the added value services, and not just wait with open arms for tourists to arrive.
Silk Road Briefing is produced by Dezan Shira & Associates. Chris Devonshire-Ellis is the practice Chairman. The firm has 26 years of China operations with offices throughout China, Asia and Europe. Please refer to our Belt & Road desk or visit our website at www.dezshira.com for further information.