Beijing Aims its Economic Influence at Strategic Pacific Island of Palau

[By Jessica Caterson]

Palau is finding itself increasingly entangled in China’s economic web—in many cases, it seems, because Beijing is controlling investment and business links with the strategically critical Pacific nation of 18,000 people.

Beijing is using tactics such as creating dominance in tourism, making empty investments in real estate, bribing local politicians and sending Chinese organised crime to Palau. Its economic influence becomes political influence as local leaders consider local jobs, incomes and infrastructures when making decisions.

It’s no exaggeration to say that the scale of China’s involvement in the Palauan economy poses a challenge to the sovereignty of this US-aligned country.

Tourism dominance

Over the past two decades, Palau grew increasingly dependent on Chinese tourism, only to suffer heavy repercussions when Beijing withdrew that business.

In 2008, Palau received 634 Chinese tourists, less than 1 percent of all visitors. By 2015, the number had skyrocketed to 91,000, or 54 percent.

But, in response to Palau’s continued recognition of Taiwan, China banned state-backed package tours to the country in 2017, and the COVID-19 pandemic further upended the tourism industry. Because 40 percent of Palau’s gross domestic product comes from tourism, the disruptions seriously affected the economy. To compensate for lost business, Palau has had to campaign for direct flights and visitors from elsewhere.

Most recently, China issued a travel warning for Palau, citing concerns over ‘frequent safety cases’. The action looks like retaliation for Palauan accusations of China being behind a March cyberattack on the country’s financial systems.

Since China issued the warning, the number of Chinese tourists coming to Palau has plummeted to barely 25 percent of all visitors. While it is still too early to predict how this will affect Palau’s economy in the long run, China is likely sending a strong signal that acting against its interests will be neither unnoticed nor without consequence.

Buying up land

Investment in Palauan real estate from China has increased since the early 2000s. An increasing number of Chinese nationals or businesses have bought leases for buildings and land of 50 to 99 years. They include businesspeople linked to the Chinese Communist Party. In many cases, no land development has followed the purchase of these leases, with many properties having been abandoned entirely. Lessees’ intentions remain unclear, but by locking up valuable land in long leases, these individuals hold substantial control over economic development on the island. If Chinese investment continues to grow at an unchecked rate, then businesspeople and officials from China will likely have leverage over Palauan economic decision-making.

Some investors appear to be advertising in China to sell Palauan land. In 2017, a Chinese website advertised available housing in Palau, promising returns up to 20 percent.

A Chinese law reportedly allows any land owned or leased by a Chinese national to be used for intelligence purposes, so Chinese nationals’ ownership of properties presents special opportunities for Beijing. That would challenge US military goals in the region.

Monetary inducements

Bribery is also part of China’s efforts at gaining sway in Palau. China appears to be using criminals to gain influence over Palauan officials and politicians.

In a well-publicized letter to an undisclosed US senator in February, President Surangel Whipps personally expressed concern over China’s inducements aimed at Palau generally. He described how China had promised economic benefits to Palau in exchange for severing ties with Taiwan, including hotel investments, increased tourist numbers and provision of US$20 million per year for a call center in Palau.

Crime by Chinese nationals

Since 2019, Palau has experienced a large increase in Chinese organised crime and drug trafficking, with illegal gambling surging in popularity.

On New Year’s Eve in 2019, 165 people, mostly Chinese nationals, were arrested in as such activities were shut down. By June 2020, four more illegal gambling operations were shut down. There are still several suspected illegal gambling operations in the country, most staffed by Chinese nationals. Authorities have determined the organisations’ leaders to most likely be tied to Chinese crime syndicates, such as the 14K triad based in Macau.

Similarly, methamphetamine trafficking from China and the Philippines to Palau has increased exponentially over the past two decades. Contributing factors include the extreme smallness of Palau’s Narcotics Enforcement Agency, made up of merely eight people. Also, corruption among law enforcement officials allows for intercepted meth packages to go uninvestigated while drugs that aren’t linked to syndicates, such as cannabis, get busted.

As Palau grapples with the economic fallout from reduced Chinese tourism, rising corruption and escalating Chinese national linked organised crime, its sovereignty hangs in the balance. Especially as it nears its November 2024 presidential elections, the US must recognize and address these vulnerabilities to reinforce its commitment to Palau, as failure to do so could result in a significant shift in the region’s geopolitical alignment.

Jessica Caterson is a masters candidate at the Johns Hopkins School of Advanced International Studies, Washington.

This article appears courtesy of The Strategist and may be found in its original form here.