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Unpacking China’s Economic Statecraft

What Happened When Beijing’s Belt and Road Came to Papua New Guinea?

Peter Connolly

Chinese Communist Party (CCP) General Secretary Xi Jinping met eight Pacific Island leaders in Port Moresby on November 16, 2018, and elevated their relationships to “comprehensive strategic partnerships.” Xi then encouraged those who had not joined his Belt and Road Initiative (BRI) to do so. Papua New Guinea (PNG) had led the way by signing a BRI memorandum of understanding (MOU) with the People’s Republic of China (PRC) in June 2018 and was hosting the Asia Pacific Economic Cooperation (APEC) forum that year. However, in 2017 most of the Papua New Guinean officials and businesspeople I interviewed did not believe their country would join the BRI because PNG had little to offer China economically. This article draws from a longer piece published in the journal Security Challenges in 2020, which compared interviews and observations from my doctoral fieldwork in 2017 with that of 2019 to assess what changed in PNG when it joined the BRI.

Chinese economic migrants to Pacific Island countries have arrived in waves, starting with the first wave, known as “old Chinese,” who departed Fujian and Guangdong provinces from the mid-19th century. The second wave arrived via Southeast Asia in the 1950s and 1970s. The third wave, known as “new Chinese,” began in the 1990s during the PRC’s “Going Out” policy, designed to encourage its enterprises to invest overseas. I believe there is now a fourth wave, consisting of Chinese state-owned enterprise (SOE) employees and officials representing Chinese state interests, which grew with the BRI’s arrival. 

Beijing’s One Belt, One Road (OBOR) strategy had started as Xi’s vision for the PRC’s economically led global engagement in 2013. Four years later, the PRC changed the name for external audiences from OBOR to BRI to avoid the perception that it was a strategy, but continued to use the original words for OBOR in Mandarin. This article uses BRI throughout to refer to OBOR in keeping with common usage in the English-speaking world. Nevertheless, the BRI and OBOR are one and the same. This article contends that the BRI is a geoeconomic strategy to propagate the PRC’s global influence and enhance its position as a rising power.

PNG was the first Pacific Island country to join the BRI. Then-Prime Minister Peter O’Neill made an official visit to Beijing in June 2018, seeking support to host APEC that year. Xi reassured O’Neill that Beijing would assist PNG’s preparation for APEC, and that he would attend the summit. To support the event, China Harbour Engineering Co. (CHEC) would build 10 kilometers of a four-lane road and APEC Haus, the facility for the forum, in 200 days. Five months later, Xi made a state visit to Port Moresby and invited the leaders of the eight Pacific Island countries that recognized the PRC to meet him there before the APEC summit. They all signed BRI MOUs with the PRC, and two more switched their diplomatic recognition from Taiwan to Beijing the following year, joining the BRI in the process. 

These events generated great anticipation of what advantage the BRI could deliver for PNG’s development, accompanied by apprehension about what it might cost. However, there remained a lack of clarity about what the BRI was.

A Chinese Official’s Perspective

A Chinese official in PNG explained to me in 2019 that the BRI is a “broad concept … an image, a brushstroke — not a very fine point.” The BRI is “a platform for cooperation … a tool to promote mutually beneficial trade and investment.” He emphasized a process of mutual consultation with PNG authorities to align with PNG’s national strategy, echoing the BRI’s 2018 recalibration after it was criticized for predatory lending. 

When asked, “So what is a BRI project?” the official admitted: “There is no detailed definition.” But he continued, “any project which is in line with the Five Connectivities” of trade, infrastructure, policy, people to people and finance may be “broadly regarded as a BRI project.” He added that “Chinese companies have a comparative advantage” because they are more affordable than Western ones.

While these guidelines probably make sense for Chinese strategic planning, they are too broad for others to discern which activities are part of the BRI. That could be by design, allowing the PRC to choose what’s in and what’s out to suit its global narrative. The official explained that a BRI project does not have to be paid for with Chinese money — multilaterals such as the Asian Development Bank (ADB), the World Bank, or even another country, could provide the financing. Furthermore, the project may have commenced before the BRI existed. “If it aligns with the Five Connectivities, it is a BRI project,” he said.

The official’s explanation suggests that a BRI project could be anything being delivered by a Chinese company as long as it fits the PRC’s strategic narrative. This enables the PRC to achieve geopolitical objectives in a campaign for global influence by using economic tools. These are increasingly paid for by others within the framework of the BRI.

Chinese workers from the Ramu NiCo refinery buy produce from Papua New Guinea women near Basamuk. Shaun Gessler

A New Chinese Perspective

According to a leading member of the Papua New Guinean Chinese business community in Port Moresby, there was an influx of Chinese construction companies to PNG in preparation for the 2015 Pacific Games. Most of them were Chinese SOEs that finished their projects but stayed in the country, driving prices down and raising competition. They had a competitive edge because they brought in workers from China and paid them lower wages, allowing them to undercut local companies’ bids by up to 50%.

The businessperson explained that O’Neill had favored Chinese companies, but when he was unexpectedly replaced by Prime Minister James Marape in 2019, the new Chinese became concerned. Marape had pledged to “take back PNG,” and this was interpreted by many as a rejection of foreign dominance in some sectors of the PNG economy, including Chinese influence. The Chinese businessperson added the confusion generated by this new policy meant that: “When the government doesn’t know, the ADB makes the decision.”

The interviewee confirmed that the BRI aims to extend the PRC’s political and economic influence in the Pacific. Once the MOU was signed, PNG was considered “on the BRI map” and “open for business” from a Chinese perspective. The number of Chinese SOEs in PNG had slowly grown since the China Overseas Engineering Co. arrived in 1995, but almost doubled in the year after PNG joined the BRI. Between June 2018 and July 2019, the number of Chinese SOEs in PNG increased from 21 to 39. Papua New Guinean, old Chinese and Western companies couldn’t compete with this market saturation. Again, most new companies entered the country to do a specific task, then stayed and won contracts by fiercely undercutting competitors. This market domination is amplified by most Chinese companies offering additional tender submissions from subsidiary companies to discourage competition.

This surge in SOE numbers is corroborated by comparing the 2018 and 2020 lists of major Chinese companies in the PRC’s Ministry of Commerce (MOFCOM) foreign investment guides for PNG. The PNG Investment Promotion Authority website in late 2019 also indicated more than 79 Chinese companies and 12 associations had been registered in PNG since 1995. This demonstrated the presence of many subsidiaries and smaller companies beyond the major ones listed by MOFCOM.

A cruise ship docks in Rabaul in Papua New Guinea’s East New Britain province in August 2017. PETER CONNOLLY

A Chinese State-Owned Enterprise Perspective

An executive from a Chinese construction SOE viewed the BRI as merely a label for what had already happened over two decades through the “Going Out” policy. He lamented that the BRI was bad for business because it scared Western governments, describing it as a “loud announcement of China’s rise [that] has made no difference” in PNG as it brought no additional Chinese funding. “We are here for business and want to avoid political trouble,” he said, but clarified: “We are businessmen, but we are state-owned businessmen — an SOE can be ordered to support what the state requires.” 

The major SOEs work closely with the MOFCOM’s economic and commercial counselor, who appears to coordinate BRI projects in PNG. The Chinese executive said SOEs accept that such direction may serve a strategic or political purpose, even if it lacks economic logic or expediency.

SOEs are the principal means of China’s economic statecraft and appear to be the ideal geoeconomic instrument. David Baldwin in 1985 established economic statecraft techniques had been used throughout history to exercise noneconomic power in attempts to influence the policies of other states. Edward Luttwak in 1990 proposed “geo-economics” as geopolitical competition short of war, and Robert Blackwill and Jennifer Harris in 2016 described this as the pursuit of geopolitical goals with economic tools. Such intent can cause economic tools to operate at odds with economic assumptions. For example, Ching Kwan Lee in 2017 demonstrated that Chinese SOEs in Zambia were differently motivated to their Western counterparts because they sought “state capital” instead of pure economic profit. An example of this philosophy in PNG was the Ramu NiCo nickel and cobalt mine and refinery in Madang province, operated by the SOE China Metallurgical Group Corp. (MCC). From 2007, the Ramu NiCo mine operated at a loss for more than a decade to achieve the long-term accumulation of these strategic resources.

However, the Solomon Islands’ diplomatic switch from Taipei to Beijing in 2019 provided an even more direct example of a Chinese SOE being employed for economic statecraft to achieve geopolitical outcomes. The general manager of the South Pacific for China Civil Engineering Construction Corp. (CCECC), based in Vanuatu, offered U.S. $500 million worth of grants and loans to the Solomon Islands to encourage Prime Minister Manasseh Sogavare to make the switch. CCECC has since committed to building the infrastructure in Honiara for the 2023 Pacific Games, satisfying a significant interest for the Sogavare government.

The SOE executive explained that he would happily use foreign funds and declared an absolute preference for ADB money over Chinese policy banks or commercial banks. He said SOEs specifically prefer ADB financing because the bank conducts professional investigations and facility studies, while Chinese banks require the host nation to conduct these processes, which can cause inconsistency and delays, particularly in payment. There is no pressure from the Chinese state to use Chinese financing as part of the BRI, he added. The PRC seems happy to spend others’ money and take the credit for it.

Funding the BRI

Attraction to ADB financing was common among Chinese SOEs in PNG between 2014 and 2019. CHEC and CCECC, which appear to have become the two leading Chinese SOEs for advancing the BRI in the Southwest Pacific, were particularly focused on multilateral funding. About 90% of CHEC projects in PNG were funded by the ADB and 75% of CCECC projects in Vanuatu were funded by the World Bank, according to senior executives in 2019. At the ADB’s office in Port Moresby, an infrastructure specialist estimated Chinese SOEs held contracts for more than 80% of ADB infrastructure projects in PNG in 2019. He explained the ADB’s rigorous processes and provided data for three decadelong infrastructure programs to expand and improve road networks in the highlands and to improve provincial airfields. These projects are clearly important for PNG’s economy and people.

The specialist believed the Chinese companies preferred the ADB because it pays contractors directly and reliably. He said Chinese SOEs always produce the lowest bids, while the ADB receives good value from this competition and ensures quality through its processes.

Four of the ADB’s biggest contributors, Japan, the United States, India and Australia, don’t support or participate in the BRI. These countries are committed to assisting PNG’s development but would not classify their contributions through the ADB as part of the BRI. At the same time, projects funded by their money but delivered by Chinese SOEs for the ADB are often claimed by the PRC as BRI projects. While the PRC makes a significant contribution to the ADB’s funds, in 2018 it was also the ADB’s largest borrower. This has attracted surprisingly little attention, despite having significant implications for the PRC’s competitors.

Dinny McMahon, an author and former Wall Street Journal newspaper financial correspondent in China, analyzed the foreign currency holdings of China Development Bank (CDB) — the larger of the two Chinese policy banks. He discovered that CDB increased its foreign currency steadily until 2014 but slowed to an incremental rise from 2014 to 2016, just as Xi began to espouse the OBOR. In 2017, as the rebranded BRI gained momentum with the first Belt and Road Forum, CDB’s foreign currency holdings started to decline. “It struck me as genuinely strange because here was CDB, supposed to be the tip of the spear when it comes to China’s BRI, and yet its foreign currency was declining,” McMahon said. He attributed this to the reduction of China’s foreign exchange reserves by nearly 25% in 2016, from U.S. $4.2 trillion to U.S. $3.2 trillion. The People’s Bank of China, its central bank, tried to defend the renminbi by using the two policy banks as a front to help prop up China’s currency.

This affected the application of the BRI to PNG. Xi promised a U.S. $300 million loan from CDB to O’Neill at the APEC 2018 forum, but it appears the CDB was reluctant to honor it. After a year of fruitless negotiations, Australia provided the loan as direct budget assistance to meet PNG’s debt. Could it be that Chinese ministries such as MOFCOM, and policy banks such as the CDB, see the BRI as more of a risk than an opportunity, particularly in places perceived to be more peripheral and less secure? The smaller ExIm Bank has traditionally had a greater presence in Pacific Islands lending, but it appears to have experienced similar pressure.

This suggests that the international banking system may end up paying for a significant share of the projects promised by the PRC under the BRI. While that may not be in keeping with China’s strategic messaging, it aligns with every Chinese perspective reviewed in this case study. The Chinese SOEs in PNG clearly prefer ADB financing and have created an environment of intense competition for multilateral financing, in which most others can’t compete with their low costs. China’s aid, policy banks and central agencies may have achieved their mission by establishing dominance of the PNG market, leaving the PRC satisfied to grow its reputation through a BRI increasingly funded by others. This environment allows Chinese economic statecraft to pursue geopolitical and geostrategic objectives.

Papua New Guinean Perspectives

Having observed the arrival of the BRI in PNG from Chinese perspectives, the most important question is: What does it mean to Papua New Guineans? Most people in PNG see the need for infrastructure and finance to develop the economy, nationally and locally. This led to high expectations for the BRI. However, these hopes have been mixed with balanced and pragmatic views of the intent behind the BRI, how it’s delivered and its potential consequences. Such thinking is the basis for PNG’s agency in pursuit of its national interests.

In 2017, before his nation joined the BRI, a PNG entrepreneur described what he hoped to see from an economic partnership with the PRC. He noted “China is changing the landscape of this country with roads, ports and optic fibre” and “Fujian grass roots opportunism” but believed PNG had only been “getting the scraps from China.” He believed “the period of ‘wild west mercantilism’ is at an end,” as the PNG market had learned to demand due diligence and higher standards, while China’s leadership now required SOEs to lift their standards of compliance globally. “In the next 10 years, China will either make or break this region,” he said. In relation to China’s influence, he concluded that the choice of “coexistence over cohabitation depends on the discipline of the state.” This discipline has been tested since 2018.

Two years later, a Papua New Guinean analyst described how O’Neill was perceived to have been heavily influenced by the Chinese while he was in office, and that his removal was related to this perception. When O’Neill was desperate for finance in preparation for APEC, “China saw opportunity to strengthen its hand with PNG,” the analyst said. Then-PNG Deputy Prime Minister Charles Abel was concerned about debt and wanted to use ADB or World Bank financing instead of ExIm Bank. According to several officials, the perception of elite capture in China’s relationship with PNG grew between the signing of the BRI MOU in June 2018 and APEC five months later.

A senior official from the PNG Department of Foreign Affairs noted that the PRC is an important development partner, delivering cheap infrastructure that PNG desperately needs. But he added, “While we need to develop, we also need to remain mindful of our own regulations … It’s a good thing, but we need to exercise some integrity on both sides.” He observed PNG was at a crossroads and needed to develop a “filtering mechanism” to preserve its national interests in its relationship with China.

A senior Papua New Guinean security official observed that the China-PNG political relationship in 2018 was unprecedented and matured at APEC through conversations between O’Neill and Xi. Other politicians were concerned they were left out of these discussions. The security official believed this contributed to O’Neill’s downfall, noting that “the political courtship was disturbing.” He acknowledged the potential for the Chinese presence to affect security and stability in PNG. Another senior PNG official observed that “the Chinese are feeding into division through their unwillingness to assimilate into communities.” China’s growing presence risks unintended consequences that could lead to insecurity or map onto existing grievances. I have referred to this as “accidental friction.”  

Interviews with senior PNG government officials in 2017 and 2019 indicated a shared understanding of their national interests. This included an awareness of the need to balance risks and opportunities as their nation’s relationship with the PRC developed. After APEC 2018, most were concerned about PNG’s increasing debt to China. This appears to have been well-founded according to a 2021 report by AidData, a research lab at The College of William & Mary in the U.S. PNG’s debt exposure to China as a percentage of gross domestic product was 17.2%, comprising 11% hidden debt (from SOE to SOE) and 5.2% sovereign debt (from government to government). The report also found that the PRC’s financial commitments to PNG had declined after it joined the BRI, in keeping with McMahon’s analysis.

These findings are perplexing but also indicate choices for PNG. Notwithstanding the issue of debt, if the BRI in PNG is largely being paid for by non-Chinese financial sources such as the ADB, this in theory gives PNG greater freedom to secure needed development at a lower cost without being beholden to the PRC. There is growing evidence this is the case, as part of broader trends identified by George Carter and Stewart Firth as a “new Melanesian assertiveness,” and by Greg Fry and Sandra Tarte as the “New Pacific Diplomacy.”

Noneconomic Costs

The PNG government has increasingly pursued its national interests within its relationship with the PRC over the past three years. In 2020, Marape refused to renew the lease on the Porgera gold mine in Enga province, which was 47.5% owned by China’s Zijin Mining Group. Later that year, the PNG Pandemic Controller David Manning sent 180 Chinese workers from the PRC’s leading SOEs in PNG back to China after determining they were part of a secret Chinese vaccine trial. In 2022, an interagency PNG task force raided the Chinese-owned MCC Ramu Nico mining operation, finding the work permits and visas of 260 staff were not compliant. Most importantly, China’s 10 Pacific Island partners rejected the PRC’s “Common Development Vision” at their second Foreign Ministers’ Meeting in May 2022. There have also been reactions to the Chinese presence by tribal power structures and local governments acting to protect their interests.

From a Papua New Guinean perspective, the BRI has brought mixed results. It has created the opportunity for cheap, rapidly produced infrastructure, along with trade and business opportunities. However, PNG officials were wary that these opportunities came with risk, frustration and noneconomic costs, as the PRC’s intent became clearer. As PNG negotiates its relationship with China, its government increasingly sees the BRI for what it is: a geoeconomic strategy that uses economic statecraft to deliver China’s grand strategy. The BRI’s perceived economic advantage, therefore, incurs noneconomic costs. It is not win-win, even if sold as such. This knowledge is fundamental to evaluating options in pursuit of PNG’s national interests.  

This article was adapted from “The Belt and Road comes to Papua New Guinea: Chinese Geoeconomics with Melanesian characteristics?” published in “Security Challenges,” Vol. 16, No. 4, Geo-Economics in the Indo-Pacific (2020), pages 41-64. It has been edited to fit FORUM’s format. To view the full article, visit

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