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Belt and Road

Laos deepens reliance on China for key transport projects

Construction cost could amount to around $18bn amid 'debt trap' concerns

This Chinese-financed expressway connecting Vientiane with Vang Vieng in Laos opened at the end of 2020.

BANGKOK -- A number of Chinese-backed highway projects are underway in the small Southeast Asian country of Laos, generating both hope and fear among a nation desperately trying to raise itself from the ranks of the world's least developed countries.

The new infrastructure projects are believed to be part of China's ambitious Belt and Road Initiative -- a massive economic zone linking it to Europe by land and sea. But concern is growing that the loans incurred to finance the projects may drive Laos into a "debt trap" if it cannot repay its Chinese creditors.

Still, Laos has little choice but to rely on Chinese largesse if it wants to see its economy recover, as the impoverished, landlocked country remains mired in the COVID-19 economic doldrums.

According to China's state-run Xinhua News Agency, the Laotian government greenlighted in early June the route of a new expressway linking the capital Vientiane in the central part of the country with Pakse in the south.

Laos is touting the 578 km, $5.1 billion expressway as its flagship infrastructure project. The route had been proposed by the Henan Provincial Communications Planning and Design Institute, a Chinese consulting company also known as HNRBI.

According to the state-run Laotian Times, the new expressway will reduce travel time from Vientiane to Pakse to seven hours from the current 10 hours, strengthening connectivity with two big foreign cities further south, Bangkok and Vietnam's commercial hub of Ho Chi Minh City.

Laos has also just embarked on a study for a mock-up of another proposed expressway linking Boten, which borders China, with Bokeo Province on the border with Thailand. The 180 km expressway would cost $3.8 billion and allow travel from southern China to Thailand via Laos in just 90 minutes. 

The two projects, whose details are still being negotiated, will allow China easier access to the Indochina Peninsula.

One Chinese-led expressway has already been completed. The 110 km highway linking Vientiane with Vang Vieng, a tourist destination to the north, opened at the end of 2020 as the country's first expressway and the first spoke of a China-Laos expressway network under BRI. It has reduced travel between Vientiane and Vang Vieng to less than two hours from what was once a three-hour trip.

"It is convenient and safe," said a 35-year-old Laotian man. "Although I have to pay a toll, I can save time and gasoline. It is better than driving on bad roads."

The Vientiane-Vang Vieng expressway is 95% Chinese-owned for now under a build-operate-transfer scheme. After 50 years, control and profits of the expressway will revert to Laos.

Still, despite the Laos government's stake in the project being only 5%, the financial burden is not light for a small country that constantly runs a deficit. Reported construction costs of the three Chinese-led expressways will total $17.8 billion -- four times larger than the government's fiscal 2020 spending and close to the country's gross domestic product.

Expressways are not the only infrastructure for which Laos depends on China. A high-speed rail service linking Vientiane to southern China is scheduled to open in December. The Chinese-made trains will run at up to 160 kph in a country that currently lacks even conventional rail.

When the rail project got rolling in September 2016, Xinhua reported, "The China-Laos railway [will be] the first Chinese overseas railway project that has been primarily financed, built and operated by China, and connect with [China's] own railway network."

In 2019, the two countries signed a "master plan to build a Laos-China community with a shared future," elevating their relations from "strategic partnership" to "a community with a shared future."

China's economic support for a country with a population of only 7 million reflects Beijing's strategic aim.

Beijing's claim of sovereignty over almost all the South China Sea has pitted the country against some members of the Association of Southeast Asian Nations, such as the Philippines and Vietnam. Winning over Laos -- an ASEAN member that is not part of the South China Sea dispute -- is pushing the 10-nation, consensus-driven bloc to heavily weigh Chinese concerns when making decisions.

In the end, Laos has few choices other than China to help shore up its economy as it tries to rise from the ranks of the world's least developed countries. The nation's new cabinet, inaugurated in March, set a yearly growth target of over 4% in its social and economic development plan for the five-year period ending in 2025.

Holding Laos back is the COVID-19 pandemic, which has decimated the crucial tourism industry. This has forced the country to turn to China's development projects as a source of funds.

But debt with China continues to balloon.

According to the World Bank, borrowing from China accounts for 75% of outstanding debt owed to other countries. Debt repayment to China alone is expected to rise 7% from a year earlier to about $442 million in 2021.

Laos' official debts have exceeded 60% of GDP, casting a cloud over its ability to repay.

In September 2020, Fitch Ratings downgraded the country's Long-Term Foreign-Currency Issuer Default Rating to CCC' from B-, saying the country's foreign currency reserves are "insufficient" compared with its future debt-repayment plan.

If Laos falls into arrears, it could possibly fall into a "debt trap," resulting in many of its infrastructure assets being seized by China. In 2018, the U.S. think tank Center for Global Development cited Laos as one of eight countries with particularly weighty debts to China.

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