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Belt and Road

China digs Laos in deeper with flurry of SEZs

With Vientiane's hunger for investment, debt-trap fears mount

Beijing is promoting special economic zones in Laos as part of its Belt and Road Initiative. (Nikkeimontage/Source photo by Reuters)

BANGKOK -- After opening its borders to China's dam builders and railway engineers, Laos is looking for Chinese companies to invest in the special economic zones (SEZs) mushrooming up all over the country. But observers question these projects, and worry about the small communist nation's mounting debt.

With Beijing promoting SEZs as part of its Belt and Road Initiative (BRI), the Boten Special Economic Zone on the border in northern Laos exemplifies the "quest for capital in exchange for land." Boten abuts the border with China's southern province of Yunnan, and Chinese developers are being given leases there of 90 years.

In early December, Khemmani Pholsena, the Laotian minister of industries and commerce, visited Yunnan to meet Chinese Communist Party officials and to sign agreements -- including plans for an economic corridor in the Boten region. Ground has already been broken by Yunnan Hai Cheng Industrial Group on the $10 billion special economic zone, which covers some 700 hectares in the mountainous region.

The Chinese group won the SEZ development contract with a 90-year lease agreement to enable investments in hotels, shopping malls, restaurants and entertainment centers intended to cater to a growing Chinese tourism market in Laos.

Tourism officials in Vientiane, the Laotian capital, play up the more than one million Chinese tourists who broke records visiting during the Visit Laos-China Year 2019 marketing campaign.

"The Chinese market is crucial to Lao tourism," Kikeo Khaykhamphithoune, the minister of information, culture and tourism, said this month at a tourism event in Vientiane. Chinese arrivals in Laos grew from 400,000 in 2014 to 800,000 in 2018.

These include gamblers heading to four casinos already operating in special zones around the country. The best known is the Kings Romans Casino, which sits on a riverine wedge of land leased for 99 years in the Golden Triangle, a notorious crossroads for drug trafficking located beside the Mekong river where Laos, Myanmar and Thailand meet.

The Kings Romans Casino is the best known Chinese business operating in the Golden Triangle Special Economic Zone in Laos.    © Reuters

To establish more zones like Boten, Laos has already approved 14 SEZs out of 40 that are planned in a bid to boost the economy, which has averaged 6% growth in gross national product over recent years. The Savan-Seno SEZ, near the Mekong, was the first that was set up in 2003, and includes a casino.

The largest is in Champasak, a southern province along the border with Cambodia. The blueprint for the 10,000 hectare, $10 billion project includes plans for over 30 five-star hotels and integrated entertainment resorts intended to draw Chinese tourists to the scenic corner of the country. The area is home to Si Phan Don, or Four Thousand Islands, on the Mekong, Southeast Asia's largest body of water.

Informed sources say the Champasak SEZ will be built in two stages. "The first phase will focus on clearing the area and building the infrastructure, and is expected to be finished by 2025," a Laotian political analyst told the Nikkei Asian Review on condition of anonymity. "The main work will start after that on the hotel and tourism components, and also on commercial agriculture."

Pornpana Kuaycharoen, coordinator of Land Watch Thai, a Bangkok-based grassroots group that monitors SEZs in mainland Southeast Asia, has been tracking Laotian efforts to attract Chinese investments in SEZs. "So far as part of the BRI, 160 Chinese companies have invested over $1.5 billion," she said. "The total land area for the 14 SEZs is 29,238 hectares, which is the largest of all the countries in the Mekong region."

President Bounnhang Vorachith of Laos during a visit to Beijing in April.    © Reuters

But development experts familiar with Laos question the merits of this business model.

"Laos is still a rural economy," Shalmali Guttal, executive director of a Bangkok-based think tank Focus on the Global South, told Nikkei. "It has not invested in the skills and human resources development to tap into the good job opportunities in the SEZs."

"It is possible that SEZs are part of a plan for industrialization, but we don't see much manufacturing in the SEZs in Laos," she said. "Instead, land is being given out as the first phase for property development -- condominiums, hotels, luxury villas, golf courses and casinos."

Laos has previously secured loans and development knowhow from China for hydropower projects to expand the economy by exporting power to neighboring countries. State-owned Powerchina Resources is constructing the $2.1 billion Pak Lay hydropower project on the Mekong. Some $1.7 billion of the financing comes from the Export-Import Bank of China. Vientiane has also borrowed from China to build a $6 billion high-speed train to ferry people from Yunnan through Laos. Beijing's ultimate aim is a fast overland connection to Singapore.

All these projects inevitably fan major debt concerns in a relatively undeveloped country of just 7 million people. The International Monetary Fund raised the alarm in August, warning that the risk of "debt distress remains elevated." By the end of 2017, the external debt of Laos stood at $13.6 billion in an economy of only about $20 billion.

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