China Is Learning to Be a Better Aid Partner in the Pacific. The West Can Too.

While changes to China’s foreign aid patterns in the Pacific are likely to benefit its influence enterprise, they also offer opportunities to the West. The Lowy Institute’s updated Pacific aid map shows three emerging trends in Chinese foreign aid patterns in the Pacific Islands: a shift from predominantly loans to grants, concentrated political focus, and more attention to Pacific development needs. 

China’s foreign investment and aid has long been dominated by a preponderant use of concessional loans, in contrast to Western aid partners’ provision of development grants. When Beijing’s Pacific aid peaked in 2016, nearly three-quarters of the total amount were loans – with the majority going to Papua New Guinea. In 2022, grants accounted for more than 60 percent of China’s aid allocated. This marked the second year in a row in which grants were most of the Chinese aid, the continuation of a trend that began in 2018.

China’s shift toward grants makes sense given the second trend: increasingly politically focused foreign aid. In 2018, China provided loans to five Pacific Island countries, but by 2022, only Papua New Guinea and Vanuatu received loans.

When the Chinese International Development Cooperation Agency was formed in 2018, China’s Ministry of Foreign Affairs and local embassies gained increased responsibility and power to control the strategic disbursement of foreign aid. Moreover, China’s foreign aid agenda is tailored to meet specific Chinese national interests and policy goals, including recognition of the One China principle by persuading countries to abandon diplomatic ties with Taiwan.

In 2020, the year after Kiribati and the Solomon Islands flipped diplomatic recognition, nearly half of China’s Pacific grants for that year went to them combined – likely from deals made before the switch. Continued increases to aid are likely intended to induce or reward deepening relations with China, most significantly in the security sector.

China has also increased grant funding by $15 million in three years for the Federated States of Micronesia, likely due to the country’s high strategic value. As a Freely Associated State with the United States, Micronesia is part of the bedrock of Washington’s Pacific strategy, the heart of the corridor of freedom from Honolulu to the Philippines, and the increasing site of U.S. military staging. In short, Micronesia is a valuable target for China to bring into its orbit.

China’s politically focused aid gives the United States a unique opportunity, as it maps where Beijing’s interests are deeply sown or where China is trying to expand its influence. A sudden increase in aid, or strong shift toward grants, could direct the attention of the U.S. government toward areas with greater Chinese influence. This trend will have to be tracked over time to validate and then employ a response. Ultimately, it would reward the United States with greater strategic warning for significant shifts toward China.

As Beijing has increased support to Kiribati, the Solomon Islands and Micronesia, China has pared down investments in other countries including the Cook Islands, Fiji, Papua New Guinea, and Samoa. In Vanuatu, China has been providing less grants and more loans. Grants are generally preferable to loans – they don’t need to be paid back – making them a more generous form of aid. By shifting its aid toward loans in Vanuatu, China may be signaling a reluctance to offer better rewards or inducements for cooperative behavior. In other words, Vanuatu may be seen as less strategically important or useful to China.