A new report looking at Chinese loans to Pacific nations has dispelled claims of "debt trap diplomacy" in the region, amid increasing cooperation on infrastructure as part of the Belt and Road Initiative (BRI).

However, the Lowy Institute, which authored the report, warned that many Pacific island nations are at risk in terms of debt sustainability because of their "small size and structural vulnerabilities," and called on China to continue enhancing transparency and improving its lending structure.

Earlier this year during a keynote speech at the Belt and Road Forum for International Cooperation in Beijing, Chinese President Xi Jinping highlighted the importance of sustainable development, saying "we need to ensure the commercial and fiscal sustainability of all projects." 

Since then, as the Lowy Institute's report mentions, China has taken several steps to improve lending to Belt and Road countries. The Ministry of Finance has issued a BRI debt sustainability framework "modeled on that of the IMF (International Monetary Fund) and World Bank," and China has also given its backing to an IMF training center "to help improve the debt management capacity of countries involved in the BRI."

Focusing on Pacific nations, the Lowy Institute's research shows that Chinese grants to the region have increased each year since 2011, with 119.5 million U.S. dollars' worth of grants committed in 2018. For countries in the Pacific which carry greater debt sustainability risk, grants offer greater security than loan packages.

China's financing to the region is still mostly in the form of loans, however research by the Lowy Institute shows that the proportion of low-risk loans from China compares favorably to institutions like the World Bank and Asian Development Bank (ADB).

46 percent of Chinese loans to Pacific nations are defined as "low-risk" according to the study, compared to the ADB (36.6 percent) and World Bank (45.7 percent).

26 percent of Chinese loans to Pacific island nations are "sustainable," compared with 6.9 percent of ADB loans and 18.0 percent of World Bank funding. The Lowy Institute found that China, compared with other lenders in the region, gives less money to countries deemed as having a "moderate risk of debt distress" by the IMF. Overall, 90 percent of Chinese loans go to countries that the IMF rates as being capable of sustainably absorbing such debt.

The Lowy Institute also found that China is "not a dominant creditor in the Pacific," with Tonga the only country in the region where China represents more than 50 percent of total debt. In Fiji, Papua New Guinea and the majority of other Pacific countries, loans from China account for 10 percent or less of total debt.

Despite the research finding that China is not engaging in so-called "debt-trap diplomacy," the Lowy Institute recommends that China continues to boost transparency, and avoids giving loans to high-risk economies in the region, suggesting that funding should be provided as grants instead.

On Monday, President Xi Jinping sent a congratulatory letter to the third China-Pacific Island Countries Economic Development and Cooperation Forum which opened on Monday in Apia, the capital of Samoa.

In his congratulatory letter, Xi pointed to a meeting with leaders of Pacific Island countries in Papua New Guinea in November 2018, which led to an agreement to elevate the relationship between China and Pacific Island countries to a comprehensive strategic partnership based on mutual respect and common development.