Updated date:

Laos: Becoming the Next Victim of China’s Debt Trap Diplomacy

laos-becoming-the-next-victim-of-chinas-debt-trap-diplomacy

Laos is increasingly becoming the latest country to fall into China's dangerous debt trap.

The root of Laos's financial problems lies in China's Belt and Road Initiative.

By constructing roads, railways, seaports, and other infrastructure in countries throughout Asia, Africa, the Middle East, and Europe, it would make the world more dependent on China.

At the same time, Laos was eager for China to loan it billions of dollars to upgrade its infrastructure.

Therefore, Laos, a landlocked territory with 7.1 million people, eagerly signed up to the Belt and Road Initiative.

Laos Strategic Location

Laos Strategic Location

Laos Belt and Road Infrastructure Projects

Laos is a landlocked country bordering Thailand, China, Cambodia, and Vietnam.

Sitting at the heart of mainland Southeast Asia, the Lao Government places a high priority on its transition from being a 'land-locked' to a 'land-linked' country.

Thus, in 2016, China began constructing a 257-mile-long high-speed railway connecting Laos's capital, Vientiane, to Boten on China's border.

Due to Laos's rugged terrain, the line includes a vast 123 miles of tunnels and almost 40 miles of bridges.

These engineering hurdles gave the project a price tag of $6 billion, equivalent to about $23.3 million per mile.

Laos borrows 60% ($3.6 billion) from the Export-Import Bank of China. The remaining 40% ($2.4 billion) was funded by a joint venture company between the two countries.

When completed, the Boten–Vientiane railway will form an essential part of the Kunming–Singapore railway.

China wants to establish a 5,500 km Trans Asia railway. The line will begin in Yunnan's provincial capital, Kunming, and then travels through Laos, Myanmar, Thailand, Vietnam, Cambodia, and Malaysia before finishing in Singapore.

Laos also allowed China to build some hydroelectric dams. Here, Laos’s mountain terrain offered more advantages than disadvantages. When combined with the nation’s rivers, they made the country a prime competitor for power generation.

After applying Chinese loans and expertise to build a dozen dams, Laos began branding itself as “the Battery of Southeast Asia.” It would produce more power than it needed and sell the surplus to neighbors.

Boten–Vientiane Railway (China -Laos Railway)

Boten–Vientiane Railway (China -Laos Railway)

Debt Load Warnings

In 2018, the Center for Global Development warned Laos that all the loans it received from China put it at risk of default.

For instance, the price tag of the Boten–Vientiane railway is about $6 billion. Regrettably, Laos mountainous terrain, 198 km of tunnels, and 61 km of bridges added enormous cost. However, at the cost of $6 billion, it is a tremendous amount of money given that Laos GDP was $18.7 billion in 2020.

This warning came just months after Sri Lanka's debts to China reached a breaking point. Like Laos, Sri Lanka joined China's Belt and Road vision and borrowed a massive amount of money from China to build infrastructure.

But Sri Lanka couldn't repay the loans from China. Thus the Sri Lankan government handed over to China a majority stake in the Hambantota Port for 99 years. The acquisition provided China with a deepwater port in the region. It can dock its navy off the coast of its key regional competitor, India.

A report issued by the Sydney-based Lowy Institute sounded the alarm that Laos' debt to China is about 45% of its GDP.

laos-becoming-the-next-victim-of-chinas-debt-trap-diplomacy

Consequences

Despite warnings from the Center for Global Development and Australia's Lowy Institute, Laos did not heed the advice.

Unfortunately, by September 2020, the Fitch Rating agency downgraded Laos' credit rating to CCC, the second downgrade in 2020, having dropped to B- in May. Moody's, in August, also downgraded its issuer rating on Laos B3to Caa2.

According to a Financial Times report, Laos's sovereign debt is about $12.6 billion, equivalent to around 65% of its GDP.

The Vientiane–Boten high-speed rail project is the largest and most expensive megaproject ever built in Laos. Laos has incurred an estimated $1.5 billion in external debt load to China in constructing the railway.

Simultaneously, the country's total foreign reserve is approximately $1.3 billion, which Fitch reckons will fall to below $1 billion this year.

Given that Laos might be unable to service the infrastructure loans it took out from China, Laos decided to hand over the majority control of its power grid to China. The China Southern Power Grid took a controlling stake in Laos' national power grid by allying with the state-owned electricity company, Electricite du Laos (EDL).

For Laos, this is a significant loss. For China, it is a massive victory.

China's Agenda

China's control of EDL puts it in a position to determine who purchases the electricity Laos generates and at what price. This equates to more significant Chinese influence over Southeast Asia.

In a general sense, the move takes Laos a step closer to being a vassal of China.

What is happening with Laos and Sri Lanka is also befalling Fiji, the Maldives, Djibouti, Pakistan, and Zambia. China has these countries and others so deep in debt that they may soon have to sign away parts of their nations over to what equates to Chinese control.

Laos serves as a critical overland entry point between China and Southeast Asia for trade. China is using Laos to increase its influence in Southeast Asia gradually.

As Laos' capacity to attract funding declines, the government has turned predominantly to China for credit. Therefore, it will become even more dependent on more Chinese loans to keep its economy afloat.

© 2021 Meziechi Nwogu

Comments

Justin Earick from Tacoma, WA on January 20, 2021:

I take an alternate view. The United States uses bombs and siege warfare sanctions to force countries into becoming our client states. China, alternately, uses infrastructure loans.

The ratings agency part is particularly amusing. Because it illustrates how the West use the World Bank and the IMF to coerce countries into implementing US-demanded austerity measures.

And Laos doesn't need the IMF in the short term, since they have China. And if their investment in infrastructure pays off, then their credit rating improves dramatically on what it was before, and they are no longer reliant on China. And China brought millions out of poverty in mere decades, so they have a road map.

It seems like your entire point, is that it's inherently bad that another country has the gall/ability to challenge US hegemony

Related Articles