SYDNEY/BEIJING (Reuters) - When Papua New Guinea Prime Minister Peter O’Neill flagged the possibility of China bankrolling a port development off his country’s northern coast in June, the consternation in neighboring Australia set off a lightening-fast response.

A Chinese construction project is seen in Port Moresby, the capital city of the poorest nation in the 21-member Asia Pacific Economic Cooperation (APEC), in Papua New Guinea, November 14, 2018. Picture taken November 14, 2018. REUTERS/Philip Wen

Despite a change in leadership in Australia’s government in August, a rival offer was swiftly formulated, government and diplomatic sources told Reuters, amid concern the strategically-located Manus Island port could regularly host Chinese military vessels.

Canberra, a staunch Washington ally, said earlier this month it would fund the port development, part of what analysts see as a push to reassert its dominance in the South Pacific as Beijing seeks a more prominent role.

“The Manus Island port was a big concern for us,” a senior U.S. diplomatic source told Reuters, on condition of anonymity. “It was feasible Chinese military vessels could have used the port so we are very happy that Australia will fund the re-development.”

Australia is preparing to make the verbal agreement formal at this week’s Asia-Pacific Economic Cooperation (APEC) forum, held in PNG’s capital, Port Moresby.

While conceived as a means to remove trade barriers in the Pacific, the hosting of this year’s APEC has also seen PNG become a staging ground for regional influence where the U.S. and China lock in competing alliances.

China has spent $1.3 billion on concessionary loans and gifts since 2011 to become the Pacific’s second-largest donor after Australia, stoking concern in the West that several tiny Pacific nations could end up overburdened and in debt to Beijing.

China says it has no ulterior motive beyond assisting the development goals of Pacific Island nations and that Australia should see it as a partner, rather than rival, in the region.

On Friday, President Xi Jinping will showcase China’s Belt and Road to Pacific leaders, several of whom are expected to sign up to the infrastructure initiative.

Australian Prime Minister Scott Morrison last week characterized the Pacific as Australia’s “patch” while offering the region up to A$3 billion ($2.18 billion) in cheap infrastructure loans and grants to counter China’s rising influence in the region.

“There is an acceptance within Australia that it has taken its eye off the ball and that has prompted Australia’s Pacific reset,” said Nick Bisley, professor of international relations at Melbourne’s La Trobe University.

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NAUGHTY STEP

This is the first time PNG, the poorest of the 21 countries in the economic bloc, is hosting the APEC summit. The country’s overriding focus is for the event in Port Moresby to be a success, Western officials say, overcoming perceptions of inadequate infrastructure, high crime rates and a crumbling healthcare system.

Aware of the importance PNG’s leadership has attached to the event, Australia and China have donated hundreds of millions of dollars to help stage the forum.

But Western efforts to leverage APEC have been a dealt a blow by lukewarm U.S. support, with President Donald Trump electing to skip the event.

Attending in Trump’s stead, Vice-President Mike Pence will not stay in Port Moresby, instead flying in and out daily from the northeastern Australian city of Cairns.

“The U.S. are well and truly on the naughty step,” a senior British diplomat told Reuters. “Papua New Guinea believes the quality of the event is not what comes from it but rather who attends and the decisions by Trump not to attend and Pence to fly in and out only for APEC has upset PNG Prime Minister Peter O’Neill.”

In contrast, Chinese President Xi Jinping will spend several days in Port Moresby and conduct an official bilateral visit.

He will also host a closed forum with Pacific leaders, where he is expected to announce a big Chinese aid and investment package to the Pacific, tying it to his signature Belt and Road infrastructure initiative, Western diplomats said.

“The President asked the Vice President specifically to do this trip on his behalf because he believed that he would be the ideal messenger for the President on American policy for the region, the President’s objectives in trade and investments, and strategically,” a senior U.S. administration official told reporters in a briefing.

Asked whether Asian nations might view Trump’s absence as a snub, Pence told reporters traveling with him to Asia: “Not in the least,” adding that Trump attended the ASEAN and APEC summits last year.

PLAYING CATCH-UP

Manus Island was a major U.S. naval base during the Second World War, playing a key role in Washington’s Pacific strategy. More recently, the island has hosted one of Australia’s two controversial offshore immigration detention centers.

Analysts say a Chinese presence there could impact the West’s ability to navigate the Pacific while offering Beijing close access to U.S. bases in Guam.

“Australia is concerned the Pacific could become the next South China Sea where Beijing militarizes the region,” said La Trobe’s Bisley.

The question is whether China has gained such a firm foothold it will prove difficult to shake, diplomats and officials told Reuters.

PNG has the largest debt to China in the South Pacific, at almost $590 million, representing about one-quarter of its total external debt.

“Chinese presence is seen everywhere. It has been achieved in large part through its investment into the country,” said a senior French diplomat who declined to be named as he is not authorized to talk to the media.

“With PNG’s economy now in trouble, what China says, goes.”

($1 = 1.3837 Australian dollars)