China is bolstering economic ties with Papua New Guinea as the Pacific nation seeks to expand trade with the world’s second-largest economy even while deepening military cooperation with the U.S.

The state-owned Bank of China (BOC) has opened its first representative office in Papua New Guinea. The office is a concrete step in Chinese President Xi Jinping’s plans to “build a comprehensive strategic partnership with Papua New Guinea,” BOC Chairman Ge Haijiao said in a speech at Port Moresby in early June.

Pacific island nations like Papua New Guinea have become a new battleground for influence between Beijing and Washington. As fears grow among the U.S. and its allies over China’s growing assertiveness in the Indo-Pacific, the nations are seen as strategically important in both the economic and security spheres.

While the BOC has not yet obtained a banking license in Papua New Guinea and cannot engage in financial transactions, local media report, Papua New Guinea’s central bank sees the representative office as a step toward introducing a new commercial bank into the country.

The Chinese side likely hopes the office will promote yuan-denominated trade.

Also last month, Papua New Guinean Prime Minister James Marape presented parliament with a visa waiver agreement with China to facilitate reciprocal travel by diplomats and government officials.

The moves come as China and Papua New Guinea expand economic cooperation on a wider scale. China has proposed the countries sign a free trade agreement and the sides are conducting a joint feasibility study.

In May, Papua New Guinea decided to establish a trade promotion body and open its inaugural overseas trade office in Shanghai. The new office could launch during Marape’s trip to China planned for sometime this year, local media report. The FTA could be signed then as well.

More overseas companies operating in Papua New Guinea are based in China than anywhere else, according to the Australian think tank Lowy Institute. They span across a wide range of industries, from retail to hotels to construction.

Papua New Guinea is drawn to China partly due to frustration over its trade with the U.S. and Australia.

Australia was the country’s largest export destination as of 2020. But since gold and other precious metals comprise over 98% of these shipments, Papua New Guinea essentially faces a trade deficit with Australia, according to Papua New Guinean Trade and Investment Minister Richard Maru.

China ranked third, after Australia and Japan, at around 6.4 billion kina ($1.8 billion at current rates) in 2020. The figure had grown 11-fold since 2012. Papua New Guinea hopes to further expand shipments of taro and other agricultural products to the country.

Last year, China signed a security treaty with the Solomon Islands, Papua New Guinea’s eastern neighbor. It also proposed a regionwide deal with 10 Pacific island nations, including on security, though the framework fell through.

After the Solomon Islands deal, the U.S. and Australia sought to deepen military cooperation with Papua New Guinea. Papua New Guinea concluded a defense cooperation agreement with the U.S. in May, and is in talks for a security pact with Australia as well.

China appears to be responding by improving economic ties with Papua New Guinea.

“Deepening ties with China complicates security ties with Australia and the U.S., given PNG doesn’t see these bilateral relationships as binary — it will deepen economic ties with China, while deepening its ties with Australia and the U.S.,” said Maholopa Laveil, the FDC Pacific fellow at the Lowy Institute.

“The Marape government is leveraging its trade ties to gain more from Australia and the U.S. in its defense agreements,” Laveil said.