Little Laos risks losing it all to China

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Image of a Chinese flag subsuming a Laos flag. Image: iStock/Getty Images

A new city is fast emerging on the China-Laos border, a manifestation of China’s Belt and Road Initiative (BRI) that if fully actualized will serve as Beijing’s new gateway to Southeast Asia.

Once known for car smuggling and glitzy casinos catering to Chinese punters, the remote Lao town of Boten is gearing up for the arrival of the Beijing-backed Lao-China high-speed railway.

Land-locked and mountainous Laos has long served as a geographical buffer between China and the rest of mainland Southeast Asia, a region where Beijing is now rapidly expanding its political and economic influence.

If all the grand infrastructure plans that have been drawn up actually materialize, the US$6 billion railway will merge with Thailand’s existing rail network, which, in turn, will connect through Malaysia down to Singapore.

Once completed, the rail line will connect the town of Yuxi in China’s southernmost Yunnan province to Boten and onto Vientiane, the Lao capital. It is designed to facilitate faster trade, movement of people and economic integration.

Laos political map with capital Vientiane, national borders, important cities, rivers and lakes. Also known as Muang Lao, a landlocked country in Southeast Asia. English labeling. Illustration.

A political map of Laos in regional context. Photo: iStock/Getty Images

Scheduled for completion in 2021 and around 16.4% completed as of January, the new train will be the first of its kind to leave the station in Laos.

Given Laos’ mountainous terrain, 72 tunnels will need to be blasted along the line’s 409-kilometer route. Builders will also need to erect 170 bridges over gorges and rivers as well as 33 stations along the line.
But can Laos, one of the poorest countries in the region on various measures, accommodate such a massive and costly undertaking without losing sovereignty to China?

Around 60% of the mega-project’s total cost will be shouldered by private investors, while Laos and China will contribute the remaining 40%. Of that share, the Chinese government will contribute 70% and Laos 30%, amounting to around US$840 million by some estimates. (The terms of the deal are not entirely transparent, par for the course in communist ruled Laos).

Regardless of the exact terms its a huge sum for little Laos, which currently has one of the lowest GDP per capita ratios in Asia. China has offered to provide low-interest loans worth US$500 million in case the Lao government is unable to pay its gathering debts. But there, some analysts speculate, is where the deal could go badly for Laos.

On May 3, Takehiko Nakao, the president of the Manila-based Asian Development Bank, warned countries in the region against unsustainable borrowing to fund infrastructure projects, which he said could leave them stuck in a debt trap.

Nakao did not single out Laos as a specific example, but he did mention China’s BRI, saying that although the ADB would cooperate with China when appropriate, caution would have to be exercised when borrowing money to cover infrastructure gaps.

Laos' Prime Minister Thongloun Sisoulith (L) shakes hands with China's President Xi Jinping (R) at the Great Hall of the People in Beijing on December 1, 2016.Photo: AFP/Nicolas Asfouri

Laos’ Prime Minister Thongloun Sisoulith (L) shakes hands with China’s President Xi Jinping (R), December 1, 2016. Photo: AFP/Nicolas Asfouri

Laos is exposed. An International Monetary Fund report released in 2017 said that the risk of “external debt distress” had grown from “moderate to high” in Laos. The country, home to Southeast Asia’s second smallest economy, owed external debts of US$13.6 billion by December 2017, up from US$12.9 billion at year-end 2016.

World Bank economists have calculated that China accounted for around 44% of Laos’ public debt in 2015. That percentage – and financial dependence – is likely to be much higher now with the train-building underway. When Laos has tardy in payments owed to China in the past, it has repaid in long-term land concessions and access to natural resources.

There are other potentially adverse economic implications of the rail line. Chinese traders and migrants are also expected to arrive by railway in Laos. The population of Boten is already predominantly Chinese and in Oudomxay, a town further to the south, as many as 25,000 Chinese entrepreneurs are reportedly settled.

Many of them came with previous road construction projects, or are just traders looking for new markets.

According to Will Doig, writing for the website Mekong Eye News Digest: “Everything related to the railway, from cement plants to workers’ jumpsuits, is branded with the same blue and white [Chinese] color scheme and emblazoned with Mandarin characters.”

An up-close photo of the driving cabs of three Chinese high-speed trains parked at a station in Beijing. Photo: Xinhua

An up-close photo of the driving cabs of three Chinese high-speed trains parked at a station in Beijing. Photo: Xinhua

Laos has tried for years to develop its economy by promoting trade, small-scale manufacturing, tourism and the sale of hydropower, mainly to neighboring Thailand.

The new connection to China is expected to boost cross-border trade and investment, but it will be next to impossible to avoid the emergence of new black markets and illicit trades that often follow Chinese migration.

Boten is a prime example. It was opened for trade in 1993 and soon turned into a gambling haven for mostly Chinese visitors. A Hong Kong-registered company signed a 30-year lease with the Lao government to develop the area into a “golden city” with casinos, duty free shops and entertainment venues.

But when it became known that the casino owners locked up people who were unable to pay off their gambling debts— and too much money was disappearing out of China — authorities north of the border forced the casinos to close, tightened customs procedures, and cut the supply of electricity to Boten.

In 2011, Boten was a ghost town after a period of bright light vitality. It is now seeing a sort of revival with expectations born of the new train, but it’s not yet clear it will be a healthy or sustainable one.

To go with AFP story 'Laos-economy-invest-China,FEATURE' by Amelie Bottollier-DepoisPhoto taken March 11, 2011 shows a Laos' Hmong hill tribe woman and her daughter walking down a street in the border town of Boten, a special economic zone land hired by China, in the Northern province of Luang Namtha. Recently still dependent on foreign development aid, Laos is benefitting from massive investments from its vietnamese and chinese neighbours. AFP PHOTO / HOANG DINH Nam / AFP PHOTO / HOANG DINH NAM

A Lao woman and her daughter walk down a street in the Lao border town of Boten with a Chinese casino in the background. Photo: AFP/Hoang Dinh Nam

One of the old casinos has been turned into a jade emporium, though there is no natural source of jade in Laos or China. It all comes from mines in northern Myanmar, and some of the traders in Boten are said to be accomplished smugglers of goods without paying duties.

Given the poor pay of Lao officials and the vast amounts of money that is coming in through the jade business it is hard to imagine that it will not fuel further corruption. (Laos ranked 123rd out of 176 countries on Transparency International’s latest Corruption Perception Index.)

Indeed, corruption was also an issue when the ruling Lao People’s Revolutionary Party (LPRP) elected a new leadership in January 2016. It was then speculated in the Western media that a power struggle had ensued between a pro-Chinese faction within the LPRP and another closer to Laos’ traditional ally, Vietnam.

Among those who were sidelined at the time was party stalwart and Deputy Prime Minister Somsavat Lengsawad, an ethnic Chinese who also goes by the name Ling Xu Guang who had been instrumental in bringing Chinese investors to Laos.

Somsavat Lengsavad, 3rd left in front row, Standing Deputy Prime Minister of Laos, and other officials attend the 8th China-ASEAN Business and Investment Summit (CABIS) in Nanning, southwest Chinas Guangxi Zhuang Autonomous Region, 21 October 2011.The 8th China-ASEAN expo and investment and business summit runs from 21 October to 26 October 2011. It has been attended by exhibitors from China and ASEAN countries totaling 4,600 booths.

Somsavat Lengsavad, (3rd L) and other officials attend the China-Asean Business and Investment Summit (CABIS) in Nanning, China. Photo: AFP Forum

A source close to the Lao leadership asserted at the time that there was no such power struggle.

Rather, the shake-up came after years of dissatisfaction with gangster-like Chinese businessmen who used phony projects in Laos to launder their ill-gotten gains from China. That included non-existing projects in special economic zones that the Lao government set up in the early 2000s.

Therefore, the source said, the shake-up wasn’t a snub to the Chinese government, or any Chinese faction within the LPRP. In fact, Beijing was not opposed to the policies of the new LPRP leadership.

“The new policies are not aimed at China, but against shoddy Chinese investors who have been treating Laos as a dumping ground for their black money, and behaving as if Laos was their own playground where they could do whatever they want,” the well-placed source said.

With the arrival of the multi-billion dollar railway, can Lao and Chinese authorities prevent a renewed influx of shoddy investors and businessmen? And if the Lao government cannot repay its debts, what would Beijing likely extract in compensation?

An International Monetary Fund report released in 2017 said that the risk of “external debt distress” had grown from “moderate to high” in Laos

It’s is not only the ADB that has cautioned against excessive borrowing to finance BRI projects. In April, IMF director Christine Lagarde told a conference in China that BRI could put heavier burdens on countries already saddled with high public debts.

Bigger questions surround what a direct high-speed rail link will mean for the region, particularly countries like Thailand that already have high trade deficits with China, and sparsely populated countries like Laos that could be quickly overwhelmed by Chinese migration.

What does seem certain is that Laos will not much longer serve as a sleepy buffer between China and Southeast Asia, and that Beijing and its outward-looking entrepreneurs are poised to extend their influence well beyond their southern border.

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