Laos-China Railway Inaugurated Amid Mounting Debt Concerns

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Laos-China Railway Inaugurated Amid Mounting Debt Concerns

The $5.9 billion railway, an impressive feat of Chinese engineering, is set to tie Laos ever closer to its northern neighbor.

Laos-China Railway Inaugurated Amid Mounting Debt Concerns

The construction site of the Pu’er high speed rail station, a part of the China-Laos Railway, in southwest China’s Yunnan Province on December 2, 2020.

Credit: AP Photo/Ng Han Guan

Officials from China and Laos today marked the official launch of the $5.9 billion railway connecting the two nations, officially completing the first link of a long-envisioned rail line connecting southwest China with Singapore.

In a ceremony in Lao capital Vientiane that was attended by Prime Minister Phankham Viphavanh and other high-ranking officials and other guests, Buddhist monks blessed the new rail line and sprinkled holy water on the first of the Chinese-made bullet trains that will soon be flying between Vientiane and Kunming, the capital of China’s Yunnan province.

According to Nikkei Asia, the first passenger run will be made through Laos tomorrow, though it remains unclear when a regular crossborder service between the two countries will begin.

The Laos-China Railway, which broke ground in 2015 and marks the effective extension of China’s high-speed rail system beyond its own borders, is an undeniably impressive undertaking. The standard gauge single-track line cuts through 417 kilometers of rugged terrain from Vientiane to Boten, the country’s main border crossing with China, from whence it continues on to Kunming, the capital of Yunnan province.

This stretch includes a jaw-dropping 61 kilometers of bridges and 198 kilometers tunnels, which will help cut travel time from Vientiane to the Chinese border, which currently takes some 15 hours by road, to just four hours.

In a Twitter post, Deng Xijun, China’s ambassador to the Association of Southeast Asian Nations (ASEAN), described the railway as a representing a synergy between Beijing’s Belt and Road Initiative (BRI) and Laos’ long-held desire to transform itself “from a landlocked country to a land-linked hub.” One report in Chinese state media wrote that it was “not just been a symbol of friendship between two nations, but also a symbol of harmony between humans and nature.”

The project will no doubt bring an economic jolt to Vientiane and the country’s mountainous north, but the extent to which this benefits the country’s predominantly rural population remains open to question. Throughout its six years of construction, people who were displaced from their homes to make way for the railway complained they were paid too little, and there have been a host of well-documented issues involving the exploitation of the Chinese laborers who have relocated temporarily to Laos to work on the project.

Aside from the disruptions of its construction, the rail line has just 21 stations inside Laos, suggesting that it is not geared at rural Lao travelers, but rather to the movement of passengers and goods from Yunnan to Vientiane (and perhaps, eventually, beyond). One U.S.-based analyst told the Associated Press that the railway was “essentially a Chinese public infrastructure project that happens to exist in another country.”

The most likely effect of the rail link is that it will deepen the integration between northern Laos and southern China, a process that has unfolded slowly over the past two decades in tandem with upgrades of the transport connections – mostly highways – linking the two countries. This has been attended by flows of Chinese capital and expatriates, which have begun to reshape the urban landscape of the Lao capital and a number of the northern provincial capitals, which all now boast large Chinese satellite communities.

The economic benefits of the project, however fairly they are distributed, will also have to be weighed against the Laos’ increasingly unmanageable foreign debt burden. Laos’ segment of the railway will be operated by the Laos-China Railway Co., a joint venture between China Railway group and two other Chinese government-owned companies, which collectively hold a 70 percent stake in the rail project. A Lao state company holds the remaining 30 percent.

According to The People’s Map of Global China, which has produced a detailed run down of the project’s financing, the government of Laos is responsible for providing roughly $1.79 billion of capital, including equity investment of $730 million and debt liability of $1.06 billion.

Due to the country’s weak fiscal capacity, however, the Lao government made an arrangement with China’s Eximbank for a separate loan of $480 million to cover two-thirds of its equity stake. This puts Laos’ total liability for the project at just around $1.54 billion. (The Chinese joint venture partners owe another $2.4 billion.) This doesn’t include other debts that the country owes China, which collectively amount to around two-thirds of its annual economic output.

While the idea of “debt-trap diplomacy” has been vastly overstated, taking on more debt that a country can pay can nonetheless have a range of deleterious consequences.

In a 2018 report, the Washington-based Center for Global Development concluded that Laos was the one Southeast Asian country risking significant debt distress as a result of loans from China – in large part due to the railway project. More recently, the COVID-19 pandemic and its economic costs have transformed Laos’s debt squeeze from a potential crisis to an actual one. In September of last year, due to dwindling foreign reserves, Laos announced that it was ceding majority control of its national power grid to a state-owned Chinese company.

If anything, the debt situation has only gotten worse in the year since. This week, the state-run Vientiane Times carried a surprisingly candid report, headlined “Govt in need of massive financial support.” According to the report, Finance Minister Bounchon Oubonpaseuth told the country’s one-party parliament that the government urgently needs 18.7 trillion kip ($1.8 billion) in order, in the article’s words, “to address the projected fiscal deficit and repay domestic and overseas loans by the end of the year.”

If the railway does not quickly begin to turn a profit – and much depends on Thailand approving the further southward extension of the line, something that it has been so far reluctant to do – Laos could find itself owing an unmanageable debt to China. Whatever Beijing’s intentions, this “will to some extent translate into China’s political and economic influence over Laos,” Li Mingjiang, an associate professor at Singapore’s S. Rajaratnam School of International Studies, told Voice of America this week.

Whether in surplus or in deficit, the gleaming Laos-China Railway seems set bind the country of 7 million people ever closer to its giant northern neighbor.