Sean Yuan
Global China Unit, Palau
The air above Palau's pristine waters smells of salt and breadfruit, and on quiet mornings in Koror, Palau's commercial hub, the thump of dive boat engines echoes across the bay.
Just a few years ago, those boats were packed with tourists, many of them from China, drawn to Palau's lagoons and limestone caves.
Hotels were full, restaurants were struggling to keep up with the demand, and fishermen were barely able to keep up.
But that is no longer the case.
This boom - and subsequent precipitous decline - were no accident.
Between 2015 and 2017, Chinese tourists made up about half of its visitors.
Then, in 2017, Beijing reportedly ordered travel agencies to stop selling package tours to Palau, cutting off the islands' then-main source of tourism.
"I had just bought new boats to accommodate the sudden increase in tourist numbers," says the owner of a dive shop in Koror.
But after the peak of the tourist boom, he says, those ships were left “floating idly in the bay” and it took years and years just to recoup the money they spent.
The message was clear, Palau officials say.
They say China has exploited its own huge emerging tourism market as part of a broader campaign to dissuade Palau from recognizing Taiwan - and to bring it back into Beijing's orbit.
The BBC has reached out to the Chinese Foreign Ministry for comment, but has not received a response.
China, however, has repeatedly denied in the past that it uses tourism as a tool for political pressure.
Palau is one of only a dozen countries that still recognize Taiwan as a sovereign state.
This undermines a key pillar of Chinese foreign policy, the "one China principle," on the basis of which Beijing claims sovereignty over Taiwan.
But this is not just about diplomatic tug-of-war.
Palau's location makes it a desirable target of influence for the world's major powers.
It is located on the so-called "Second Island Chain" - a series of outposts that America sees as crucial to containing Chinese military expansion and responding to any aggression in the Western Pacific.
Palau and the US have a long history of partnership: before its independence in 1994, Palau was a US-administered territory.
Under an agreement known as the Free Association Agreement, Palau grants America exclusive military access in exchange for extensive assistance from Washington, including the ability for Palauan citizens to live and work freely in the United States.
Acting under the terms of this Agreement, the US is now strengthening its own military presence in the archipelago.
This geopolitical struggle for supremacy between China, Taiwan, and the US is reflected in the lives of people in this small country with a population of less than 20.000.
"Whatever they do, Palau will be at the center of any military activity because of its location," Palau President Surangel Whips Jr. tells the BBC.
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Palau's relationship with Taiwan has deep roots.
When Palau gained independence in 1994, Taiwan rushed to secure a diplomatic ally, according to Cheng-Cheng Li, an assistant professor at National Dong Hwa University in Hualien, Taiwan, who has conducted extensive research on Taiwan-Palau relations.
Taiwan's aid to the country was direct: agricultural experts worked side by side with locals, medical teams existed in small clinics, local entrepreneurs were funded, and students were invited to Taiwan on scholarships.
In a country with a small population where a model of community service plays a key role, many Palau officials describe Taiwan as a "reliable partner" and "trusted friend."
Taiwan's ambassador to Palau, Jessica Lee, told the BBC that local leaders had assured her that their relationship was "solid as a rock until death do us part."
Yet Taiwan still has reasons to worry.
In recent years, China has managed to take away several of its former allies.
In the Pacific region alone, the Solomon Islands, Kiribati, and Nauru severed diplomatic relations with it and sided with Beijing after 2019.
Beijing sees democratically governed Taiwan as its own breakaway province that will eventually become an integral part of its country again, and has not ruled out the use of force to achieve this.
Controlling Taiwan is crucial to Chinese leader Xi Jinping's goal of reversing what he calls China's "century of humiliation" at the hands of colonial powers, according to analysts.
“Both America and Taiwan are paranoid and nervous about Palau converting,” says Graham Smith, a senior fellow at the Australian National University.
"They will put a lot of effort into ensuring that doesn't happen."
Officials in both Palau and Taiwan say Beijing has pulled a range of levers to influence Palau's diplomatic stance.
After taking office in 2021, the president of Palau publicly announced that China had offered him “one million” tourists in exchange for Palau’s support on this issue.
He refused.
And then in 2024, the Chinese Ministry of Foreign Affairs issued a security alert, advising Chinese citizens to “exercise caution” when traveling to Palau.
"If China is using tourism as a weapon, then it is an unstable market that we should not depend on," President Whipps told the BBC.
"If China wants relations with Palau, it can have them, but it can't tell us that we can't have relations with Taiwan."
China, however, denies using tourism as a political weapon.
In a column published last year in the People's Daily, the official mouthpiece of the ruling Communist Party, the paper claimed that China's intention in issuing the warning was to protect its own foreign citizens in light of "the increasing number of security threats in Palau."
The newspaper added that the accusations by the Palau president are an attempt to smear China and interfere in its internal politics.
Asked in 2017 about the ban on tour groups, a spokesperson for the Chinese Foreign Ministry said he had “not heard of such a situation.”
But in 2024, in response to Palau's continued recognition of Taiwan, the Ministry called on Palau "to make correct decisions that are in line with its own interests."
Although China has not commented on the alleged offer of one million tourists, not everyone agrees with President Vips' assessment.
Many locals the BBC spoke to do not share the president's stance on tourism.
"He is very belligerent towards China," says Pai Li, a Taiwanese hotel owner in Koror.
"I don't think it's right to say that China has 'weaponized tourism' - it's simply using it as a bargaining chip, just like people do when they play chess, and all countries do it all the time."
Either way, the consequences of the sudden rise and fall of tourism remain visible.
The economic shock after the cancellation of tourist groups was severe, but so was the ecological trail of the sudden influx of tourists themselves.
Palau, according to environmental organizations, was not ready for mass tourism.
“After the Chinese tourism boom ended, I went there and the corals were dead,” said Anne Singeo, director of the Ebil Society, a local NGO.
"You would see hundreds of people in that little cove, all standing on the coral. That was the price we paid for not having regulations in place to use these resources with due respect."
Tourism is just one part of the alleged Chinese tactic in this game.
Beijing is also trying to strengthen relations with local leaders: Palau officials say Beijing has repeatedly invited them to visit.
During one such visit, the former governor of Palau asked why Taiwan could not become independent.
"Taiwan is part of China," the Chinese Communist Party official replied, appearing angry.
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The American factor
With China's military activity around Taiwan intensifying, including air and sea patrols, the US has claimed that China is preparing its military to be ready to invade it.
To stop potential Chinese aggression towards Taiwan and overall military activity in the Western Pacific, the US has reinforced its own military infrastructure in Palau.
Over the years, Washington has been refreshing airport runways, building a Tactical Over-the-Horizon Multi-Mission Radar (TAKMOR) system used to monitor military activity in the Pacific, and planning to expand the port of Malakal, Palau's main port, to accommodate larger military ships.
However, the US has expressed concern about one particular weak point: land acquisition.
Documents seen by the BBC show that several Chinese companies have leased land and begun building properties near these locations, from unused plots of land to hotels overlooking Palau's harbor and main airport.
In Angaur, in the southern state of Palau, for example, the US is now building a site for the Takmora receiver - a plan announced in 2017.
However, in 2019 and 2020, Chinese investors leased 350.000 square meters of land following the announced construction of the radar.
One investor, Zhuang Qizhong, proposed building a resort there.
"We went to visit his company in China and he presented us with a plan to build a nursing home for wealthy Chinese retirees," said former Angaur Governor Marvin Ngirutang, who believes the Palau government should work more closely with China.
"There were blueprint books - everything looked legitimate."
The project was never completed.
Zhuang blamed Covid-19 for this, but Washington remains suspicious of everything.
The US ambassador to Palau was not available for comment, but had previously expressed concerns.
"You have all sorts of land all around there that is now leased to Chinese interests," US Ambassador Joel Ehrendreich told Reuters.
"I don't think it's any coincidence that they are physically close to our projects."
Such concerns are also felt among the locals.
“Their biggest concern is that these investments or rentals are not legitimate businesses,” says Jennifer Anson, Palau’s national security adviser.
"They may be on the outside, but when the time comes for China to invade Taiwan, they could be transformed into military sites."
Chinese media, however, report that there are legitimate reasons for companies' initiative to invest in Palau.
Phoenix News, a state broadcaster, highlighted the advantages of buying property in Palau in 2019, citing its abundant tourism resources and relaxed legislation.
The BBC was unable to contact Zhuang.
China's Foreign Ministry did not respond to a request for comment on questions related to the land lease.
In the shadow of a diplomatic vacuum
Organized crime linked to China has also been on the rise since 2018, according to Palau authorities.
President Whips Jr. said there was a "constant battle," while pointing to China-linked crime, which includes fraud, illegal casinos, and cyberattacks.
Some officials claim that criminals took advantage of the lack of diplomatic relations between China and Palau.
Van Quoc Koi, known as “Broken Tooth,” who led the notorious 14k triad from Macau, for example, entered Palau in 2018 as a foreign investor.
The crime syndicate later engaged in bribery, corruption, and online gambling in countries such as Palau.
Additionally, in 2025, the US Treasury Department imposed sanctions on several individuals in Palau due to their ties to the Prince Group, a conglomerate controlled from China.
The group has been accused of fraud, money laundering, mass human trafficking, among other crimes.
The Prince Group did not respond to a BBC request for comment, but previously "categorically" denied engaging in "any illegal activity", according to a company statement following the US sanctions.
Many of these individuals have found themselves on Palau's own list of "undesirable aliens" and, according to Anson of Palau's National Security Office, are cashing in on China's inability to hunt them down due to the absence of diplomatic relations.
"If you look at the websites of the Chinese diaspora in Cambodia, you will see that there is sometimes a discussion there about whether it is wise to move to Palau, but on the other hand, criminals are attracted by the absence of a Chinese diplomatic presence there," said Graham Smith from the ANU.
Pawn of the great powers
For many Palauans, the discussion of the high-level geopolitical struggle seems distant, yet its ripples are felt everywhere.
American military expansion, Chinese investment, and rumors of hidden intentions are contributing to a growing sense of unease.
“The administration is very belligerent towards China and I think it’s ridiculous,” says the former governor of Angaur, who opposes the construction of Takmor.
"We should focus more on the environment and less on Sino-US relations."
A petition circulating in recent months asks Washington to state clearly and unambiguously what its backup plans are in the event of war - a good sign of how deep-rooted the anxiety is.
She calls on America to "reassure the people of Palau" that civilians will be protected if conflict breaks out.
"We know very well what the geopolitics between China and the US look like," said one resident.
"And we fear that our island will be destroyed by a war in which we want no part."
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