The Pacific Banking Forum

The first Pacific Banking Forum, held in July 2024, attempted to create a multi-actor solution but did not include Chinese companies or representatives from the Chinese Government or Malaysia. In attendance, United States of America (US) Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson made six commitments, including exploring the development of new digital systems. Australia’s Treasurer Jim Chalmers pledged AUD$6.3 million to support compliance work—digital identity, anti-money laundering, counter-terrorism, and law enforcement.

Assisting with compliance is a matter of absolute necessity for the developed states’ own security and for the PICs to develop congruently with the Western-led liberal market. However, the different levels of development between the most developed and complex markets and the regulatory capacity of the PICs is a significant source of delinking, and a real barrier to establishing enduring market-based banking services.

For example, the Solomon Islands is highly dependent on a single export commodity—logging—with over 80 percent going to China. The Solomon Forrest Association includes most of the 100+ largely foreign logging companies. These companies operate within a widely criticised and unsustainable political economy of logging. This system exploits customary land ownership loopholes, benefits from political patronage, and focuses on corporate profits extraction. The logs are then turned into finished Chinese products for the Western world.

The Solomon Islands commercial sector is dominated by Chinese businesses such as Win Win Investments, as well as some Malaysian logging companies such as Kumpulan Emas Group (the corporate structures of Malaysian logging companies have been well documented in regard to Papua New Guinea). Solomon Islands international trade consists of logging, fisheries, palm oil, and gold. In 2018, the bulk of this trade—US$380 million or 67 percent of total exports—went to China, with an average of 63 percent from 2015 to 2017.

In 2020, the EU imported 12 percent of Solomon Islands exports and China 57 percent. The main source of imports into the Solomon Islands in 2018 was Australia, which had 18 percent or US$110 million, followed by Singapore, 16 percent with US$98 million, and China, with 15 percent at US$89 million. Hence, the main demand for international banking services in the Solomon Islands is Chinese, destined for the China-regulated banking system and RMB.

Thus, by seeking to boost correspondent banking relationships in the Pacific, the Pacific Banking Forum may encourage Chinese State agents, including the Bank of China, which is already in the region via a Memorandum Of Understanding with Nauru, to participate in this campaign. China has Comprehensive Strategic Partnerships with several states in the region. The 2023 partnership agreement with the Solomon Islands, signed by Prime Minister Manasseh Sogavare, includes trade and investment, while the 2024 Joint Statement, agreed to by Prime Minister Jeremiah Manele, also includes the digital economy.

Contrary to the stringent and onerous compliant requirements imposed on respondent banks by Western correspondent banks, cross-border payments and access to international financial services via a Chinese correspondent bank, presumably, may be far more flexible and less stringent; therefore, some Pacific local banks such as the HFC Bank of Fiji and Vanuatu National Bank could qualify to be respondent banks; a role, until recently when the BSP bank had participated, had largely been undertaken by Australian Banks, mainly the ANZ and Westpac. Thus, the Pacific Banking Forum is an excellent idea with good intentions; however, there are risks, including geostrategic ones, that could undermine its aims that have to be recognised and managed.

In addition, the RMB and the Central Bank of China’s Digital Currency Electronic Payment (DCEP), along with the digital yuan (e-CNY), have been in trial since 2020. When used for a state’s main bilateral trade, and as a means to circumvent Western regulatory impositions, these could potentially lead states into a China-centric trading bloc for their own benefit. There are enormous benefits to the DCEP-e-CNY—as a technical solution, to improve efficiency, to lower compliance costs, and as a direct link to a state’s largest trading partner.

It is keenly remembered in the region that Nauru was effectively expelled—listed by the Financial Action Task Force as a non-compliant country—from the global banking system between 2000 and 2005 as a result of corruption, as well as its threats to the developed world by enabling the War on Terror. Nauru was without financial services for years due to US foreign policy overriding Pacific development. Nauru will be debanked again in 2025 when Australia’s Bendigo Bank leaves to possibly be replaced by the Bank of China.

For Australia and other PICs, China is already the main trading partner. A region-led political bureaucratic effort to ensure compliance may best support PICs states in maintaining best-practice, anti-corruption standards to protect the developed world. However, from an economic perspective, it may be argued that working with China is far more realistic for Pacific development. Thus, it may be more functional for the US to encourage through a promise to out-develop China—including democracy, self-determination, climate action, religion, culture, and sustainability—rather than require compliance from an unviable banking market.

Similarly, elevating the provision of enduring banking services to a geostrategic strategy may also invite China to compete, raising the spectre of great power competition and a proxy-grey zone war through financial services. A geostrategic approach may also alter the market model to emulate the Chinese model of state banks, possibly permanently distorting the regional financial services market and ensuring Chinese dominance already being funded through its Belt and Road Initiative.

Thus, presently led by the Pacific Banking Forum, the Pacific may see the departure of the Western market-based banking system. It could be replaced by regional banks that receive government assistance to meet best practice standards and can accept low profitability and reputational risk. These factors have been the main drivers of de-banking due to market failure. However, the trade fundamentals—China-orientated—and efficiency and compliance benefits of DCEP-e-CNY may lead PICs to lean towards China for their own benefit.

In July 2024, US Deputy Secretary of State Kurt Campbell warned that China wants far more than a military base in the Pacific, and Australian Foreign Minister Penny Wong declared in June 2024 that Australia is in a state of permanent contest in the Pacific. The Pacific Banking Forum, with its goal to maintain access to enduring banking services for the Pacific, may need to build a more technological approach akin to China’s DCEP-e-CNY. It should also be one that considers market realities and avoids sending a worrying message to the region that banks will also be agents of the US and Chinese governments in advancing their geostrategic foreign policies, and thus, may readily jettison Pacific development if necessary.

This article was written by Jonathan Ping and Peter Forau an advisor to the Solomon Islands government who has held held senior positions and leadership roles in the Solomon Islands government and regional organisations. It was published by the Australian Institute for International Affairs.