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Laos The Latest China Debt Trap Victim

Source: Asia Times

The US$6 billion China-Laos highspeed railway is on track for completion in just over a year, with the first train scheduled to arrive in the capital Vientiane on Lao national day, December 2, 2021.

The day traditionally commemorates the communist takeover in 1975 and the economic and social progress achieved under the Lao People’s Revolutionary Party, but next year’s event will also herald a certain loss of sovereignty to its giant neighbor to the north.

Recent reports suggest Laos is the latest nation to fall victim to a Belt and Road Initiative (BRI) debt trap, whereby nations are pressed into making sovereignty-eroding concessions after defaulting on their infrastructure-related debts owed to Beijing.  

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Laos’ foreign exchange reserves have fallen below $1 billion, less than the country’s annual owed debt payments, putting the country on the verge of a sovereign default. News reports suggest that the Lao Finance Ministry has asked China, its biggest foreign creditor, to restructure its debts to avoid defaulting.

Last month, Moody’s rating agency downgraded Laos to junk territory, from B3 to Caa2, and changed its outlook on the country from neutral to negative due to “severe liquidity stress.”

Laos has borrowed heavily to invest in several Mekong River hydropower projects as well as the $6 billion high-speed rail project, a key link in China’s BRI design to connect its southern province of Yunnan with mainland Southeast Asia.

Around 60% of the train’s cost is financed through an Export-Import Bank of China loan. The remaining 40% comes from a joint venture company comprised of three Chinese state-owned firms, which hold 70% of the remaining stake while a Lao state-owned enterprise has the remaining 30%.

The Lao government has allocated $250 million from the national budget and taken out a further $480 million loan from the Export-Import Bank of China to finance its share of the venture.

Those financial obligations, however, have apparently become untenable for the Lao government as it moves to sell state assets to stay afloat.

On September 4, Reuters reported that Vientiane is set to cede majority control of the national electric power grid to China Southern Power Grid Company, a state-owned enterprise headquartered in Guangzhou.

The Chinese news agency Xinhua reported from Vientiane on September 2 that the agreement “marks a significant progress in enhancing win-win cooperation between Laos and China in the power industry.”

Xinhua also quoted Khammany Inthirath, Lao minister for energy and mines, as saying that China Southern Power Grid Company’s “advantages in experience, technology and human resources…will bring a fresh outlook to the Lao power industry.”

That “fresh outlook” for the power industry, coupled with its control over the railroad, means China is set to expand and strengthen its economic influence in the region, significantly at a time regional economies are reeling and desperate due to the pandemic.  

Much of Laos’ power generation is slated for export not only to China but also to neighbors such as Thailand and Vietnam, meaning China will indirectly gain commercial and strategic leverage over those two neighboring countries.

That could boost Beijing’s leverage in pushing the railroad beyond Laos’ borders, namely across the Mekong River into Thailand and from there throughout mainland Southeast Asia down to Singapore.

The railroad’s construction in Laos has been no mean engineering feat. Once in operation, it will take about ten hours to travel from Yunnan’s provincial capital Kunming to Vientiane, a journey of some 1,022 kilometers.

The 422-kilometer stretch in mountainous Laos consists of 190 kilometers in tunnels and 62 kilometers on bridges. According to Xinhua, the project “is the first step in building a railroad network which connects China with other Southeast Asian countries.”

With a population of only 7.3 million, more than half of which lives in small villages without proper road access and often without regular power, Laos’ nominal gross domestic product (GDP) per capita is a paltry $2,670, among the lowest in Asia.

The railroad will therefore hardly be used by the general public in Laos. But Thailand is proving a much harder nut to crack than small and economically weak Laos.

Although talks have been held with China about a high-speed railroad all the way to Nongkhai opposite Vientiane, which would provide the linkage Beijing desires, there seems to be limited enthusiasm in Thailand.

The Thais appear to be more interested in improving its rail connections with Chiang Mai and other towns in the north to the industrial zones on the eastern seaboard, or perhaps with Nakhon Ratchasima in the northeast — whistle stops far removed from the Mekong River and the Lao railroad.

China has also suffered a setback when, in the first week of September, the Thais made it clear that they are not interested in pursuing a Chinese pitched plan to build a canal across the Isthmus of Kra in Thailand, which is the narrowest part of the Malay Peninsula.

That canal would have made it possible for Chinese vessels to bypass the Strait of Malacca, but the Thais did not want a foreign power controlling and running such a strategic facility that would conceivably physically divide the Muslim-dominated south from the rest of the country.

That hasn’t apparently hampered Beijing’s push and enthusiasm for the BRI in Laos.  State-run Xinhua is holding up the China-Laos railroad as “one of the notable landmarks in showcasing Chinese high-speed railroad networks to the world.”

Xinhua reports that there are now a total of 233 Laos at the Beijing-backed Confucius Institute in Vientiane, where they are studying Chinese and learning to be train drivers, engineers and “supervisors of railroad maintenance.”

The danger for China, though, is that the much-hyped high-speed train — and the BRI — will screech to a halt at Vientiane’s station.

China’s taking over Laos’ electricity sector in lieu of paying debts has shown other regional countries the risks of BRI debt traps, few of which are as vulnerable as Laos when it comes to resisting Chinese pressure and defending their financial and economic independence.