By James Grubel

CANBERRA, June 11 (Reuters) - China's chequebook diplomacy in the South Pacific and secrecy over its aid programme to small island nations is having a destabilising impact on the region, an Australian foreign policy think tank said on Wednesday.

China's promised aid to Pacific Islands nations has increased from $33 million in 2005 to about $293 million in 2007, with the key aim of stopping small nations from recognising Taiwan, Lowy Institute researcher Fergus Hanson said.

China regards Taiwan as a renegade province, but six tiny island nations officially recognise Taiwan, prompting an aid bidding contest between China and Taiwan for recognition.

"For Pacific states, it can be an opportunity to play the two Chinas off against each other with a view to increasing their aid," Hanson said in his paper, released on Wednesday.

"But the outcome is not always in the interests of recipient or donor," he said.

Hanson said the secrecy surrounding China's aid programme, and use of Chinese firms and workers to carry out aid projects, often fuelled concerns that dollar diplomacy was influencing local politics.

He said violent riots which erupted in the Solomon Islands capital of Honiara in April 2006, destroying Chinese businesses, were fuelled by islander concerns that Chinese money had influenced the outcome of that country's elections.

Eight developing Pacific Islands Forum nations, Papua New Guinea, Vanuatu, Cook Islands, the Federated States of Micronesia, Fiji, Niue, Samoa and Tonga, recognise China rather than Taiwan.

He said the secrecy over China's aid spending can breed resentment among islanders and fuel anti-Chinese sentiment rather than improve sentiment.

At the same time, Western nations were concerned the lack of aid transparency undermined their efforts to improve law and order, democracy, and crack down on corruption across the South Pacific.

For example, Hanson said China had increased aid to Fiji after the nation's military coup in December 2006, as Australia, New Zealand and the United States imposed sanctions against the new military regime in order to promote a return to democracy.

He said China kept its aid spending secret to stop demands from countries who receive less than others, and to avoid domestic backlash about overseas development assistance.

Hanson said while China had interests in fish stocks and resources in the region, it had little other defence or strategic interests other than stopping or reversing diplomatic recognition of Taiwan.

(Editing by Jeremy Laurence)

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