In a recent development, Australia has maintained its position as the leading source of development aid in the Pacific, surpassing China by contributing a significant one-third of the region’s loans and infrastructure investments, as highlighted by a new report.
A detailed examination of development initiatives from 2008 to 2024, conducted by the Lowy Institute, reveals that after a period of decline, aid in the Pacific witnessed a resurgence, increasing by 10 percent in 2024.
In 2024, total development aid reached US$4.1 billion (or AUD$5.85 billion). However, projections by the report’s authors suggest a decrease to US$3.8 billion (AUD$5.42 billion) in the yet-to-be-released 2025 figures.
As China shifts its focus from large-scale, debt-driven loans to smaller, more strategic aid, coupled with significant economic challenges across the Pacific, competition for regional influence has intensified.
In 2024, Australia emerged as the chief benefactor to the Pacific, donating $2.14 billion, which accounted for 37 percent of the total financial aid directed to the region during that year.
A total of $6 billion in financing was dispensed from New Zealand, China, and regional development banks.
Australia has also inked $3.4 billion in loan deals, ending China’s reign as the region’s leading lender.
“That’s a product of many years of Australia pushing into these spaces, but it’s meant that what was once a real foothold for China in the region has been narrowed,” the report’s lead author Riley Duke told SBS News.
“Australia is consistently providing the most grant financing to the region, and that picture hasn’t really changed.”
The report, released on Tuesday, says demand for Chinese loans has dropped since 2019 due to concerns about servicing the debt, more competition between lenders and Chinese banks’ capital availability.
Australia is also a major financier of climate change mitigation projects in the Pacific, including a solar and battery storage facility for Palau to help generate 20 per cent of its electricity, and Tonga’s Renewable Energy Stabilisation Package.
The fruits of those efforts have paid off for Australia, with a flurry of regional security deals announced in recent months, including with Fiji, Vanuatu, Papua New Guinea and Tuvalu.
“They are a clear marker of Australia establishing itself as the lead partner to the region,” Duke said.
“Those deals … take a long time to progress. They’re complicated, but they reflect Australia establishing itself as an inalienably important partner to Pacific countries.”
Why does the Pacific rely on aid?
Developing Pacific Island nations have been hit hard by multiple shocks, including the COVID-19 pandemic and more recently, fuel supply shortages caused by the United States-Israeli war on Iran.
Duke said these multiple challenges put the region at risk of a “lost decade” of development, with Pacific economies caught in “a continual cycle of shock and recovery”.
Food and importing oil costs much more for the Pacific than other countries because of transport fees, fertiliser prices and reliance on diesel generators for power.
The war on Iran is estimated to hit Pacific economic growth, shaving 1 per cent off pre-war growth projections of 3.4 per cent next year.
Australia has stepped in to help Fiji, Solomon Islands, and Samoa to help absorb fuel-price shocks and help with supply.
What is China helping build in the Pacific?
China used to be the dominant lender to the region but shifted its strategy in more recent years to focus on more “small and beautiful” projects — as President Xi Jinping has described it — to win regional influence.
“China’s lending collapse to the region, sort of meant that it had to pivot or adapt how it engaged through aid and development channels, and how that’s materialised is these smaller, more grassroots projects,” Duke said.
“China is offering more training. It’s been donating more equipment, more scholarships, and you know it’s trying to find new ways to build relationships with Pacific countries.”
Those smaller donations include equipment to schools, police forces, and hospitals across the Pacific, as well as training to build up regional health, media, and policing industries.
Its largest single grant is a US$135 million ($192.63 million) project for new roads and bridges in Fiji, followed by the Nauru National Sports Stadium (US$73 million), the Vanuatu Earthquake Recovery Grant (US $57 million), and the High School Sports Complex in Tonga (US$26 million).
Duke said Chinese aid in the Pacific is “highly reactive” to diplomatic developments, and acts as a “strategic lever”.
“When a country switches diplomatic recognition from Taipei to Beijing, or opens strategic negotiations with Australia, Chinese aid flows react.”
One example is Nauru’s 2024 switch of diplomatic recognition from Taipei to Beijing — after which a flurry of Chinese aid followed, including the stadium project.
The report also found Chinese state-owned firms dominate contracts for infrastructure projects, including for multilateral projects.