Papua New Guinea: Trade with China on the rise

Growing interest from China in the Asia-Pacific region has driven up investment in Papua New Guinea (PNG), helping to accelerate economic expansion.

PNG has notched up 12 consecutive years of growth, supported by the ExxonMobil-led liquefied national gas (LNG) project, which has received $19bn in investment and galvanised a long list of national development projects.

The resource-rich nation remains a favourite among emerging market investors, especially in the Asia-Pacific region. China, in particular, has reaffirmed its commitment to investing long term in PNG, which has become the prime beneficiary of soft loans distributed by China to South Pacific nations. The funding was made available after China’s then-premier, Wen Jiabao, pledged in 2006 to grant the countries a total of RNB3bn ($485m).

While Australia remains PNG’s key trade partner, China is closing the gap, with combined imports and exports hitting $1.2bn in 2011, according to the latest available data. Trade is expected to increase from 2014, as China’s standing agreement to purchase 2m tonnes of LNG per year takes effect.

China’s interests within PNG are expanding rapidly. More than 20 of its firms are established in PNG’s infrastructure development and property construction, while the $1.5bn Ramu Nickel and Cobalt mine leads China’s resource extraction interests. The mine is owned by SOE Metallurgical Corp of China, an offshoot of the Chinese Ministry of Metallurgy.

China has teamed up with PNG to roll out a wave of big-ticket developments, led by the 9700-sq-metre International Convention Centre in Port Moresby, which marks the largest, single Chinese-backed project in the South Pacific.

China’s autonomous state-owned enterprises (SOEs) have also been at the forefront of PNG’s development, with lower margins, home-sourced materials and imported labour giving them a competitive edge and making them an attractive proposition for the Port Moresby government.

“China is trying to use its major SOEs to do the construction work for some of our major infrastructure projects,” PNG’s prime minister, Peter O’Neill, told the Wall Street Journal in December 2012. “We are working together with the Chinese companies which are in the Fortune 500 to develop many of the infrastructure [projects] for us.”

China is well-placed to tap into the PNG government’s new wave of national infrastructure and development projects, which have been allocated PGK12.1bn ($5.38bn) in the 2013 budget. Private developers, including the property arms of both Steamships Trading and superannuation fund Nambawan Super, have already awarded contracts to Chinese firms. Companies from China are also playing a major part in the PGK1bn ($444m) overhaul of PNG’s Lae Port and national road rehabilitation projects, which are being co-financed by the Asian Development Bank.

More partnerships are expected on the back of a PGK6bn ($2.67bn) China EXIM Bank loan, which was announced last year. While the loan was originally set to target infrastructure projects, it looks likely to evolve into a comprehensive credit package of up to PGK10bn ($4.44bn).

If approved, such a loan could have significant implications for Chinese firms. “What first appears to be state-run aid often turns out to be company-driven outward direct investment, and international aid projects are simply assimilated into these companies’ overall business dealings,” Graeme Smith, a post-doctoral fellow at the University of Sydney, recently wrote in EastAsiaForum. “Indeed, these types of infrastructure projects are increasingly dominant in Chinese investment in PNG, overtaking China’s longstanding focus on natural resource acquisition,” he noted.

However, PNG’s resources are still in demand, and China would be well-placed to benefit should PNG decide to take up a concessional commodity-for-finance agreement, along the lines of what has been done in Africa.

PNG’s minister for works, Francis Awesa, has already indicated that China’s largest integrated energy company, China National Petroleum Company (CNPC), is likely to have a role to play in the EXIM Bank loan deal. CNPC, together with China’s national oil corporation, Sinopec, have both signed supply agreements to purchase LNG from PNG. The state-owned shipbuilding conglomerate, China State Shipbuilding Corp, meanwhile, has begun work on four LNG ships to carry gas from PNG and Australia.

Former secretary of state, Hillary Clinton, has already spoken of the challenge that China poses to US interests in PNG. While competition isn’t yet rivalling American interests, US-backed LNG investment in PNG is poised to accelerate activity levels in China’s businesses. For PNG, however, rising investment from both China and the US likely spells a win-win scenario.

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