Wed, 12 May 2021

Laos Braces for Promise, Peril of China's High-Speed Railway

Voice of America
04 Mar 2021, 21:05 GMT+10

KUALA LUMPUR, MALAYSIA - After five years of hard work boring dozens of tunnels and building even more bridges to lay more than 400 kilometers of train track, China's high-speed railway through Laos is on course to launch within the year.

State media in China and Laos say service could begin by December.

For sprawling China, analysts say the line promises to inject new growth into the country's backward underbelly by plugging it into some of Southeast Asia's largest markets and ports.

As for tiny Laos, they add, it could boost a heavily resource-reliant economy with more trade, tourists and industry - if at the cost of crippling debt and the growing sway of its giant neighbor.

The view from China

Part of Beijing's sweeping Belt and Road Initiative, the $5.9 billion project will connect China's landlocked Yunnan province to northeast Thailand through northern Laos. It is the first leg of a serpentine line Beijing hopes will one day reach to bustling Singapore via Thailand and Malaysia.

The corridor is a cornerstone of China's plans to bring parts of the country left behind by decades of spectacular growth up to par, said Mana Southichack, an economist and founder of Lao Intergro, a local consultancy.

"The government has been trying to equalize the west and the east, and this rail link is very critical for China's success to develop the western region," he said.

Besides helping China tap into some of Southeast Asia's largest economies, seaports along the way will give it new and cheaper routes to India and other important markets farther west, Southichack added.

"It makes a lot of sense from China's point of view," he said.

With no end in sight to the China-U.S. trade war, the line will also help China as a whole push off from Western economies by pulling Southeast Asia's closer, said Imogen Page-Jarrett, China and Laos analyst for the Economist Intelligence Unit.

"It's important for them to ensure they have positive trade relationships and diversified trade relationships, especially with countries that are politically supportive of China ... so that China can ensure it has supplies of strategic goods like food, energy and natural resources and so on. So I think it's not purely economic - it's also political, it's also strategic," she said.

Landlocked to land-linked

Laos stands to gain too.

The country's economy leans heavily on exporting a few key resources, namely minerals and hydropower. Its lack of a coastline limits its options. The government hopes the railway can start to turn that into an advantage by making Laos a useful go-between for neighbors wanting to trade with each other.

The country shares borders with China, Vietnam, Cambodia, Thailand and Myanmar.

"So potentially Laos can benefit from its position in the middle of all that," said Page-Jarrett.

The goal is to transform Laos from landlocked to land-linked and to profit from the traffic.

Southichack said high transportation costs due to poor roads and rail have also made it tough for Laos to spread investment beyond the resource sector and to develop other export industries, forcing it to import most of the inputs for what it does make. He believes the new railway can cut those costs "substantially."

The economist said that will prove especially useful once Laos sheds its Least Developed Country label.

A United Nations panel recommended in February that Laos, having hit key growth and development targets, graduate from LDC status five years from now. Countries with the status benefit from free-trade access to major Western markets.

"Once Laos graduates Laos will lose this, meaning Laos has to be more competitive. This rail system will enable Lao producers to become more competitive; at least transportation costs will be lower," Southichack said.

Risk and reward

The World Bank is cautiously optimistic.

In a report on the project last year, it said the line "could provide [Laos] with a land link to global and regional supply chains, which could make the country more attractive to investors, create new jobs, and accelerate economic growth."

To make that happen the bank said the line would have to shift much of the existing trade flow between China and Southeast Asia from sea - today's route of choice - to land. It said Laos would have to put in much more work streamlining border crossings and building more roads and cargo facilities to help local traders connect with the line.

Southichack added that the government will have to help small businesses team up with exporters to make sure it's not only the big players who win, much as the U.N. Food and Agriculture Organization is already doing with farmers.

Thousands of locals of modest means along the route have meanwhile been displaced with little compensation or had vital water and irrigation systems damaged by the work.

The World Bank also warned of the project's high financial cost.

Laos has a 30% stake in the $5.9 billion joint venture, much of it covered with loans from China, the country's biggest lender by far. According to the International Monetary Fund, Laos owed China at least $250 million last year for the railway alone.

Debt-trap diplomacy

With a gross domestic product of under $19 billion and an economy hit hard by the pandemic, Laos is struggling to pay it off.

The World Bank says Laos is the only country in mainland Southeast Asia facing a "risk of external debt distress," and international credit rating agencies have taken note. Fitch downgraded Laos' rating twice last year, and Moody's lowered the country's sovereign bond to junk.

Critics of China's BRI accuse Beijing of using mega-projects like the highspeed railway to set debt traps, deliberately drowning partner countries in loans they can't afford to back them into giving up shares in other strategic assets.

Beijing denies the claim, but Page-Jarrett said China has started delaying or writing off some of the debt Laos is building up to pay for the railway and other Chinese-backed projects in exchange for asset transfers.

Late last year, as default fears loomed, Laos gave up shares in its power grid to a Chinese state-owned power company. The government has said little about the deal, but Reuters, citing sources familiar with the arrangement, reported that Laos gave China a controlling majority stake.

"That's quite a strategic asset to give to a foreign power," Page-Jarrett said.

"The implications of this are Laos is becoming increasingly exposed to political pressure from China," she added. "The rail is definitely going to bring [Laos] economic benefits. It's basically economic benefits for ... greater political influence."

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