The President of Palau, Johnson Toribiong, says Chinese investment has dried up since Palau granted asylum to six former Guantanamo detainees from the Chinese Muslim Uighur minority.
Mr Toribiong says shortly after the Uighurs' arrival in 2009, construction stopped on a Chinese-backed five-star hotel in Palau even though the 100-room project was almost finished.
He says he has been advised that the Chinese investor, who by that time had invested several million dollars into the project, can no longer get money out of China for the project.
The Palau leader was responding to questions from a US Senate committee which is determining how Washington should fund Palau under a compact of free association between the two countries.
He says Palau had agreed to Washington's request to take the Uighurs without hesitation, when no other nation would even consider providing such refuge.