August 17, 2018 / 7:53 AM / in 3 months

Tonga backs down on Pacific plan to pressure China on debt

WELLINGTON/SYDNEY, Aug 17 (Reuters) - Tonga’s prime minister on Friday backed down on calls for Pacific island nations to collectively lobby China to forgive their mounting debts, after a source said Beijing had complained about the plan.

Tonga is one of eight island nations in the South Pacific carrying significant debt to China, and had started building support in the region to press the lender to cancel repayments.

Pacific nations were due to progress the plan at a forum of regional leaders scheduled to be held in the tiny island nation of Nauru early next month, Tongan Prime Minister ‘Akilisi Pōhiva told Reuters on Thursday.

In a statement on Friday, Pōhiva said “after further reflection” he now believed the forum was not the proper platform to discuss Chinese debt, and that Pacific nations should each find their own solutions.

“Each Pacific Island country has its particular national conditions and different needs for foreign loan, and it’s up to each government to independently seek solutions through bilateral channels,” Pōhiva said.

A source familiar with the matter said the Tongan government received a complaint from China shortly after Pōhiva called on indebted island nations to consider a coordinated response to China.

In the interview with Reuters, Pōhiva said Pacific nations who borrowed from China should “collectively work together to find a way out”.

MOUNTING DEBT

In Friday’s statement, Pōhiva said China was the only country willing to provide large-scale concessional loans to help Tonga rebuild its capital after riots in 2006 and over the years had provided a range of grants that had “greatly facilitated Tonga’s development”. A recent Reuters analysis of the financial books of South Pacific island nations showed China’s lending programmes have gone from almost zero to over $1.3 billion currently outstanding in a decade.

The high debt burdens among small economies with little earning power has stoked fears the region could fall into financial distress and become more susceptible to diplomatic pressure from Beijing.

China’s Foreign Ministry did not immediately respond to a request for comment on the statement. It has also not yet commented on Pōhiva’s original remarks.

China has previously said it retained good relations with Tonga and there was no evidence China was responsible for creating unsustainable debt in the region.

Despite holding little economic sway, each small Pacific state represents a vote at the United Nations. They also control vast swathes of resource-rich ocean and hold strategic military significance.

The issue of Chinese debt levels - Tonga owes $115 million to Beijing, representing about one-third the size of its annual gross domestic product - has become more pressing after China took possession of a Sri Lankan port as Colombo struggled with a spiralling debt crisis.

China had never threatened to take assets from Tonga in any way, Pōhiva said in the statement.

Tonga is due to start an onerous principal repayment schedule of its Chinese debt in September.

Reporting by Jonathan Barrett in SYDNEY and Charlotte Greenfield in WELLINGTON; additional reporting by Ben Blanchard in BEIJING; Editing by Lincoln Feast.

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